Who made money in the collapse

If you listen to the pundits and the politicians, you’ll hear all kinds of excuses for why our entire economy collapsed virtually overnight. Lots of blame on sub-prime loans- and even that the government was responsible for pushing people into homes they couldn’t afford.

It’s all total BS, but finding someone credible to point out that banking deregulation turned Wall Street into a casino was impossible.

Until I heard this amazing interview by Terry Gross of NPR’s Fresh Air- interviewing Michael Lewis, author of “Liar’s Poker” and his new book “The Big Short: Inside the Doomsday Machine

In between these two- he also wrote “The Blind Side” which turned into an academy award winning movie.

Lewis approached the reporting of the fall of Wall Street by looking for people who made money hand over fist in the failure. He found some amazingly unlikely winners- people who bet against the probable. And, the word “bet” is the word that comes up over and over.

Here is just a short bit:

Ledley and Mai stumbled into the subprime mortgage market and realized that they could bet against not only the loans but also the financial institutions themselves.

“They’re able to piece together a clear picture of what’s going on in a matter of months,” Lewis says. “They become less interested in the bet than the social implications of what they’re learning. They go to the SEC. They go to The Wall Street Journal. They’re screaming at the top of their lungs, “My God, there’s fraud in the system.”

By betting against subprime mortgages, Ledley and Mai’s $15 million investment ballooned to $120 million. Soon, Ledley began to experience migraines and anxiety attacks.

“They were stressed about being right,” Lewis says. “I think they were so stressed that they realized that this wasn’t a bet against a company, this was a bet against an entire system. And it was a bet that arose from their insight that the system had become rigged — that, essentially, Wall Street had become a giant Ponzi scheme.”

via Michael Lewis’ ‘Big Short’: How A Few Made Millions Betting Against The Market : NPR.

Lewis has no problem explaining the mess- and what a credit default swap is- and how it was responsible for the implosion. You can either listen to the podcast- or read the entire transcript.

The whole concept of “investing” short- or betting against a company doing well has always been of questionable value in my book. Who needs it? Isn’t it counter-productive to the overall idea of “growing” a business and our GDP?

There are things that could be done to stop this from happening again. Lewis spells out the key three in detail:

  1. The first is, it’s crazy that a Wall Street firm can advise customers to buy and sell stocks and bonds and at the same time be making bets with its own money on those stocks and bonds…the so-called Volker rule, named for Paul Volker because he’s advocating it, makes total sense, is to say to these firms, you can’t trade for your own accounts in things when you’re advising customers. So that’s a really simple reform but its going to be devastating to Wall Street.
  2. Another simple reform, I mean, it’s so obvious that you can’t believe it hasnt happened yet, just simply eliminate these bilateral private transactions that go on between these firms that leave them exposed to each other, like credit default swaps. Why should Deutsche Bank be able to call up Morgan Stanley and do, you know, make an $8 billion bet that neither one of them actually records on their balance sheets. It creates horrible uncertainty and instability to have this kind of murky world of side bets going on and nobody knows who’s got them. So you never know how actually healthy these institutions are. So, all things that are traded, credit default swaps, for example, should be traded through exchanges and on screens so everybody can see them.
  3. And the third thing that’s very obvious, so obvious you can’t believe that it hasnt happened is, why on earth are the ratings agencies, Moody’s and Standard & Poor, paid by the people whose bonds they are rating? It’s inevitably going to lead to problems because they’re incentivized to please the people who pay them.

Until we close the casinos on Wall Street- and eliminate the “bet” factor, we’re not going to see people investing in companies for their ability to actually create real, tangible value- which is what creates real jobs- and will bring America back to prosperity

There were people who recognized the danger that this system was creating- some of them made huge amounts of money- yet still worried about the long term implications of their success. Unfortunately, our leaders are terrified to enact rules to level the playing field and put value back where it belongs- in the hands of those who create real goods and services- instead of those who gamble with other peoples money because we let them.

Note: Ask Mike Turner about enacting this kind of regulation while he’s campaigning. Ask him his position- see if you can get an answer.

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