THINK WE CAN .com

It seems a recent article₁ in the New Your Times (Oct 3, 2008) has gone all but unnoticed; which is odd, because it explains exactly how the economy of the United States was sent reeling into deep recession (not depression, hopefully).

The story begins on the bright and brisk afternoon of April 28, 2004, when the five, distinguished members of the Security Exchange Commission walked into a hearing room in the basement of the SEC building.  Although they now admit they had no clue at the time, these gentlemen were about to make the most monumental decision of their collective careers—a ruling that, 46 months later, would be instrumental in bringing the economy of the United States of America to its knees.

In a recording of the meeting₂ you will hear the five were in good spirits, even joking when one commented on their decision, “We’ve said these are the big guys, but it means that if anything goes wrong, it’s going to be an awfully big mess.”  Another playfully added, “I’m very happy to support it and I keep my fingers crossed for the future.”

Do you suppose they double-dared each other?

What these Masters of our Financial Universe did was remove all limits on the debt our largest investment banks could carry on their books.  The ruling unleashed the firms to gamble on the most speculative and risky investments in the world, such as CDOs (collateralized debt obligations) and CDSs (credit default swaps).  And the banks would be allowed to gamble in any amount they wanted, even if they had little money of their own to gamble with.

The five people who were supposed to guard us against dangerous activities in our gigantic, investment banking industry, the commissioners of the SEC, told those giant firms to police themselves, no pesky rules or oversight to limit them, just bet on margin to their hearts content; even to the tune of many trillions of dollars.

Now, in case you’re not aware, buying investments on margin works like this:  Suppose you have only one dollar and you want to buy a stock.  Normally you can only buy one share of a one dollar stock. If the stock price rises to $1.05, you make 5%.  But if your broker allows you to buy on margin, he might let you have 2 to 1 buying power.  So you can then buy 2 shares, even though you only have money for one.  When the stock rises to $1.05, you have made double the profit, or 10%.

Margin can work against you, of course, if the stock price goes down, because you are losing twice as much.  So, when on margin, you want to be careful about what you buy.  Due diligence is the main rule of buying stocks on margin--investing 101 if you will.

Well, the ugly news is that the largest investment houses in America went on margin as much as 33 to 1.  And what did they purchase, with our money as it turns out?—the worst investments imaginable, those junk grade CDOs and CDSs.  As we all know, those terribly speculative investments caused the bankers to lose some 3,000% more money than they actually had—an awful lot of OUR money.

These leaders of the SEC and the investment banks were some of the most respected, most highly educated, most honored, financial leaders on planet Earth.  Either these people are lacking in the most rudimentary common sense, or something much more sinister occurred in this matter.

These people, and many, many more like them, are not going to stop, unless we stop them.  They are so self-confident, self-assured, and frankly, so arrogant in many cases, they don’t think they need to change.  They will find ways to blame others for the problems they cause.   If you haven’t noticed, they are already trying to lay off their mistakes on what they describe as us whining, lazy and somewhat ignorant citizens of Main Street.

More on this matter will follow in ensuing columns.  But I say now, there should be no doubt at this time that major sectors of our economy and society need re-engineering, oversight and control.  The leaders of corporate America must be put under greatly increased government scrutiny.  There must be some real rules, some sort of common sense exerted, and soon.

Is there anyone now who doesn’t think our financial gurus are figuring new ways to get their hands on major portions of the bailout trillions?  Let’s hope we elect a new president who understands the change required in critical areas of our society.  But for now, it’s time to reverse a couple words in the old and tired cliché, It’s the Economy, Stupid.  Let's tell it like it is right now:

It’s The Stupid Economy.

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1.  NY Times Article of Oct. 3, 2008
2. SEC Meeting recording, Apr 28, 2004