Why Occupy Wall Street is in the wrong place

[Quantum Windbag]

A couple of people have asked me specifically why I think Occupy Wall Street is in the wrong place. Freakonomics actually did a column about it today, and they touched on all of the things I am concerned about, and brought up a couple I hadn't thought about.

:

• In 1997 Andrew Cuomo, the Secretary of Housing and Urban Development under Bill Clinton, allowed Fannie Mae to reduce the standards by which they would secure loans. This helped create the entire subprime category. Was this a bad thing? Of course not – it allowed more people to leave the ghetto, move to the suburbs, and achieve the American Dream of owning a home. Who knew that “Dream” would turn into a nightmare in a mere decade. Cuomo is not Nostradamus. We can blame him of course, but he had good intentions despite the negative results.

• We can blame the Federal Reserve of course. They lowered interest rates after the dot-com bust so much that there was no way for anybody to achieve safe, steady returns using conservative investments like bonds. Everyone — you, me, retirees — wanted higher returns for their 401(k) and pension plan. So we went to the banks and said, What can we do? And the banks said, Well, you’re the ones asking for higher yields, so here it is. And they bundled together all the newly made subprime mortgages into mortgage-backed securities (MBS) so that the average guy could finally get some yield since the Federal Reserve was blocking all other alternatives. So if you want to occupy the Federal Reserve, go to Washington, D.C. Of course, they had good intentions too. They wanted people to stop buying bonds and start buying stocks. And it worked! Until it didn’t.

• And what about the banks who bundled together these mortgage-backed securities? I don’t know, you and I asked for those securities through our 401(k) plans. So they were just responding to demand, right?
  Fine, so what about the hedge funds. Suddenly they saw these mortgage-backed securities yielding 10% and immediately bought them up. They were greedy! But weren’t they just trying to find safe returns for their investors? Either way, the hedge funds aren’t on Wall Street. Go occupy Greenwich, or Park Avenue — but not Wall Street.
  But then investment banks like Lehman saw what the hedge funds were doing, and they started doing it too: scooping up as much yield as they could, risk be damned! Greed! Again though, this was a handful of CEOs, many of whom have been fired from their jobs. I’m not trying to apologize for them. But let’s make sure our anger is pointed in the right direction.

• Which now brings me to the biggest culprits yet: the accountants! Right in the middle of all of this mess, the Financial Accounting Standards Board (FASB) changed GAAP accounting rules so that you could no longer mark a mortgage-backed security according to your own statistical analysis. You had to start marking it down as soon as there were the slightest defaults and the paper started trading at lower values (this is called mark-to-market). Which meant that hedge funds trading in these illiquid securities could make just a few trades involving a hundred thousand dollars or so, and suddenly trillions of dollars would be wiped out of the value of the banks. Hedge funds gleefully took advantage of this accounting rule change, and tons of bank equity was wiped out. Once FASB changed the rule back (April, 2009) the banks (and all stocks) went straight up.

Freakonomics » Dear Occupy Wall Street: Are You Sure You’re in the Right Place?

It comes down to one thing, be careful what you ask for.

 

[Baruch Menachem]

They were selling crap as gold. the MBS were marketed as if they were US government debt.

 

[Chris]

Derivatives destroyed the economy. Buffett warned about Wall Street in 2003.....

The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy and most shares are still "too expensive", legendary investor Warren Buffett has warned.
The world's second-richest man made the comments in his famous and plain-spoken "annual letter to shareholders", excerpts of which have been published by Fortune magazine.

The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.

But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system.

Contracts devised by 'madmen'

Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment.

Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years

BBC NEWS | Business | Buffett warns on investment 'time bomb'

 

[Chris]

Then the derivatives bubble grew to $516 TRILLION DOLLARS in 2008....

The market is worth more than $516 trillion, (£303 trillion), roughly 10 times the value of the entire world's output: it's been called the "ticking time-bomb".

It's a market in which the lead protagonists – typically aggressive, highly educated, and now wealthy young men – have flourished in the derivatives boom. But it's a market that is set to come to a crashing halt – the Great Unwind has begun.

Last week the beginning of the end started for many hedge funds with the combination of diving market values and worried investors pulling out their cash for safer climes.

Some of the world's biggest hedge funds – SAC Capital, Lone Pine and Tiger Global – all revealed they were sitting on double-digit losses this year. September's falls wiped out any profits made in the rest of the year. Polygon, once a darling of the London hedge fund circuit, last week said it was capping the basic salaries of its managers to £100,000 each. Not bad for the average punter but some way off the tens of millions plundered by these hotshots during the good times. But few will be shedding any tears.

The complex and opaque derivatives markets in which these hedge funds played has been dubbed the world's biggest black hole because they operate outside of the grasp of governments, tax inspectors and regulators. They operate in a parallel, shadow world to the rest of the banking system. They are private contracts between two companies or institutions which can't be controlled or properly assessed. In themselves derivative contracts are not dangerous, but if one of them should go wrong – the bad 2 per cent as it's been called – then it is the domino effect which could be so enormous and scary.

A £516 trillion derivatives 'time-bomb' - Business News, Business - The Independent

 

[Kuros]

So gov't error and capture exculpate Wall St?

The banks sold securities they knew were bad. They violated fiduciary duty after fiduciary duty. But because the gov't allowed them and subsidized them, its all the gov't's fault?

Yes, the GSEs invented securitization, and even encouraged banksters to help them spread it. But how does that exculpate originators from selling bad mortgages to Goldman et al. who defrauded investors?

Who caused the disastrous housing bubble in the U.S.?

This question has been asked countless times over the past few years. The right generally blames government-sponsored entities Fannie and Freddie while the left generally blames Wall Street. They're both right.

QW, your premise is additionally flawed, because occupy Wall Street plans to gather numbers before marching on D.C. They are not as eager to apologize for the politicians as you seem to be for the banksters.

 

[Quantum Windbag]

So gov't error and capture exculpate Wall St?

The banks sold securities they knew were bad. They violated fiduciary duty after fiduciary duty. But because the gov't allowed them and subsidized them, its all the gov't's fault?

Yes, the GSEs invented securitization, and even encouraged banksters to help them spread it. But how does that exculpate originators from selling bad mortgages to Goldman et al. who defrauded investors?

Who caused the disastrous housing bubble in the U.S.?

This question has been asked countless times over the past few years. The right generally blames government-sponsored entities Fannie and Freddie while the left generally blames Wall Street. They're both right.

QW, your premise is additionally flawed, because occupy Wall Street plans to gather numbers before marching on D.C. They are not as eager to apologize for the politicians as you seem to be for the banksters.

Did you even read what I quoted?

 

[Chris]

I wasn't the housing bubble that brought down the economy.

It was a $516 trillion dollar derivative bubble.

 

[Toro]

Wall Street definitely deserves much of the blame but they certainly aren't the only ones.