My dear sister Rose and I got together for lunch downtown today. She selected Tosca, on F Street, and ordered the Tuscan lamb. I had the thymed rabbit ragu.
“Tom,” she gratefully told me between bites, “you have no idea how good something like this can taste after you’ve lived off nothing but ground chuck, macaroni and cheese; and whatever’s on sale or you have coupons for, month after month.”
“My pleasure, Sis,” I assured her, and didn’t say one word more. True, she and her husband have a huge brood, but both of them have good middle class jobs, too. As regular readers of this Web log know, however, as a result of the current mortgage crisis, Rose’s family shares their home with the family of her husband’s brother, and between the four parent’s incomes, they can barely afford to take care of their kids, pay the bills and meet the monthly mortgage installments. The fact that Rose’s home is now worth about sixty grand less than she and her husband paid for it doesn’t help her morale, either, of course. So I was paying for lunch, naturally, and by no means feeling exploited; nor was I expecting reciprocation any time in the next couple of decades, for that matter.
“I took a sanity day off from work today,” Rose confided. “This morning, about eleven, it hit me – everybody else was either at work, at school, or at day care – I was the only one home. I went out on the front porch and looked all around at the other houses in the neighborhood. It was like a ghost town, completely deserted. It was so quiet, Tom. It was… eerie.”
“Since I work at home occasionally,” I concurred, “I’m familiar with that phenomenon. Whole neighborhoods, completely deserted, and the only sound is crows cawing in the distance.”
“It gave me the willies,” Rose declared, shivering slightly. “So I turned on the cable news, and there was this guy, somebody from the Treasury Department…”
“Oh, yeah,” I acknowledged, “that would have been Henry Paulson. He’s Secretary of the Treasury.”
“Okay,” Rose nodded, “that makes sense. He was talking about some kind of blueprint…”
“That’s the Administration’s ‘Blueprint for a Modernized Financial Regulatory Structure,’” I clarified. “Things finally got so bad, they had to come up with something or risk looking like a bunch of torpid, incompetent idiots.”
“But,” Rose interjected, anxiously, “they’re not, really, are they?” She and her husband Hank are loyal Republicans, and she’s quite sensitive about certain things, such as when I refer to our President as “Pumpkin Head.”
“The Administration, you mean?” I stopped eating for a moment, taking a deep swig of my Gavi di Gavi La Scolca 2006. “Did I say that the George W. Bush Administration is a bunch of torpid, incompetent idiots? No – I said they wished to avoid looking like that. The same,” I elaborated, “as Hillary Clinton wishing to avoid looking like a lying, scheming, sociopathic, power-mad, man-hating, crypto-lesbian feminazi harpy. I mean, who wants to look like that?”
“But,” Rose protested, “Hillary Clinton is a…”
“Ah, ah, ah,” I interrupted. “Comity, please. You know that’s my watchword – ‘comity.’ ‘If you can’t think of something nice to say, then don’t say anything at all.’”
“Thanks, Thumper,” Rose shot back, just a bit sarcastically, citing the bunny from “Bambi” whom I had quoted without due attribution. “Tom,” she continued, leaning over the table toward me slightly with an air of expectation, “do you think that their plan will help fix things, with… you know…”
“The recession?”
Rose recoiled back in her seat. “Don’t say that!” Her voice turned into a low, whispering hiss as she reiterated her plea – “Just… don’t… say it!”
“Okay,” I shrugged, returning to my plate of elegantly prepared Thumper, “no problem. You’re the big sister here, after all.”
“But really,” she pressed me, “do you think they can take care of things? Make it like it was…”
“Before Bush stole the election from Al Gore?”
“He did not steal it!” Rose began fuming – not much, just a slight simmering, really. “We both know that the Supreme Court made that decision, and the Supreme Court is as honest as the day is long.”
“Sure,” I replied with a mischievous wink, “and by the way, since I can tell you sincerely believe that, I wonder if you’d be interested in some Florida resort real estate…”
“Tom,” she scolded, “stop being so cruel! You know I didn’t marry Hank for his brains! So,” she resumed, gazing at me with an uncharacteristically imploring expression on her face, “what do you think? Are they going to fix things?”
“Well,” I began, “let’s look at the facts. The first thing they’re proposing is creation of an inter-agency coordinator role for the President’s Financial Markets Working Group with respect to issues such as systemic risk, capital market competitiveness, market integrity and consumer issues. Another major initiative in the proposal is to expand the Federal Reserve Bank’s information gathering and oversight role with respect to investment banks – the Fed would conduct on-site bank examinations and establish other audit measures in order to monitor and assess investment bank and associated securities firms for their funding and liquidity. Another big point is the establishment of a federal Mortgage Oversight Commission to monitor how states regulate mortgage brokers.”
“Sounds like the Administration’s going to take some pretty effective steps, then,” Rose opined.
“Well, actually,” I explained, “the Administration can’t really do any of those things. Congress will have to write and pass legislation for them.”
“Oh.” Rose looked down at her lamb. “But those are good suggestions, aren’t they?”
“On the surface,” I agreed, “they sound very good, indeed. But by the time the gang down on K Street gets their two cents in with the members of Congress…”
“K Street gang?” Rose was apparently confused by my insider jargon.
“The lobbyists, that is,” I explicated. “Investment banks, mortgage brokers, securities dealers, stock brokers – all those parts of the financial industry have lobbyists on retainer and plenty of money they’ve stolen from the public with which to pay them. On the other hand, the public has no organization to hire lobbyists – and no money, either, since the financial industry keeps stealing it. So anything requiring legislation will turn out to be useless.”
“How so?”
“Well, for starters, the lobbyist will make sure that while the Financial Markets Working Group has responsibility for systemic risk, capital market competitiveness, market integrity and consumer issues, it won’t have any authority to do anything about them – only a mandate to report its findings to Congress. Then they’ll see to it that the Fed’s oversight and investigation powers for investment banks and their associated securities businesses are completely hamstrung by innumerable complicated “professional privacy,” “enterprise confidentiality,” “business espionage prevention” and “fair competition assurance” provisions that will, in most cases, prevent federal auditors from finding out anything at all, and in every case prevent them from doing something that stops Wall Street from separating the suckers, ahem – I mean, the investors, from their life savings.”
“What about the mortgage bankers?” From the tone of her voice, Rose clearly expected better news about those prospects.
“Sorry to disappoint you,” I consoled, “but that’s the weakest of the three proposals to begin with. Any attempt by Congress to establish a federal oversight agency for state mortgage bank regulators is doomed to a Supreme Court challenge over states’ rights and the interstate commerce clause of the Constitution. That’s a case which the federal government is bound to lose, too, because there’s no way you can argue that selling real estate is interstate commerce – the commercial transaction constituting the sale of a piece of real estate in Delaware, Ohio, California or wherever obviously occurs solely within that state.”
“So if that’s all going to be useless,” Rose lamented, “then what is the Treasury Department proposing that will actually do something to get the country out of this… mess we’re in?”
“In order to understand that,” I advised her, “it’s a good idea to use an analogy – think of the federal government financial agencies as sort of like a fire department.”
“Okay,” Rose smiled, “I get it. They inspect buildings to make sure they meet the fire codes and, if an accident happens, they come to the rescue and put out the fire; anything that looks suspicious, they investigate and prosecute for arson.”
“Yes,” I went on, “and no. True, after the crash of 1929 and the Great Depression, the federal government constructed a financial ‘fire department’ that was intended to function pretty much as you described. But starting in 1980, with the first Reagan administration, the nature of that fire department changed in a fundamental way. You see, starting with Ronald Reagan, that fire department of which we speak was no longer in the business of preventing fires, putting out fires and investigating arson. No, starting with Ronald Reagan, that fire department’s mission was to torch people’s houses so crooks on Wall Street could sell tickets for mobs of morons to watch them burn down.”
“Oh, Tom,” Rose complained, “lighten up, will you? I mean, you make it sound like every banker and broker in this country is nothing more than a greedy, degenerate, thieving confidence artist who preys on widows, orphans and frail old geezers in the AARP.”
“I certainly didn’t mean to make it sound like that,” I countered contritely. “After all, they manage to prey on young married career couples like you and Hank pretty successfully, too, and not just by dangling overpriced Mc Mansions with absurdly constructed mortgages in front of them, either.”
“No need to rub it in, Tom,” Rose whined. Then, suddenly, the light went on upstairs – being my sister, she can sense when I allude to something, and she now realized she sensed just that. Her eyes narrowed slightly as she peered at me. “What do you mean, ‘not just by dangling overpriced Mc Mansions… in front of them?’”
“I was just remarking that over the last twenty eight years, the criminals of Wall Street have had plenty of time to take all the simple, straightforward financial concepts and twist them around into a plethora of ‘derivative instruments,’ each calculated to relieve the suckers of their dough better than the ones preceding it.”
Rose could tell I was driving at something now. “Such as?”
“Oh, take, for example, the ‘auction rate security.’ A derivative built upon a portfolio of municipal bonds and similar instruments, its underlying investments are some of the lowest risk securities available. The interest rates ARS investments pay reflect that, too, being quite modest. But one doesn’t expect low risk investments to pay high interest – low interest rates are supposed to correlate with low risks. And that’s just how the scum bags – ahem, securities brokers – pitched them, telling the suckers – ahem, the investors – that ‘these are just like cash,’ ‘these are very liquid,’ ‘they have cash funds availability on a two week time frame,’ and so forth.”
Rose took a long gulp of wine. “Auction rate securities? You mean, like Nuveen?”
“Oh, that’s right,” I replied, “you and Hank put what, eighty thousand of the inheritance from his parent’s estate in Nuveen, didn’t you?”
“It… it’s the children’s college fund,” Rose whimpered. “The guy at Citi Bank, he recommended it; he said it was very safe, just like cash.”
“That’s what they told everybody,” I assured her. “But what none of them ever told anybody was that, should the weekly or bi-weekly auction market for those securities fail, there is no wider market for them.”
Rose finished her wine and poured another glass, her hand shaking slightly. “So if there aren’t any buyers at these periodic auctions, then…”
“Good question. It seems that the geniuses who dreamed up the ARS never bothered to think things out that far.”
“Oh, God…” Rose dipped into her purse for her cell phone. “Excuse me. I need to call Citi Bank right away.”
“No point in calling the nice man at Citi Bank,” I chided. “The ARS market disappeared last month, like a bedouin in the night.”
Rose’s usually healthy complexion turned an ashen gray. “We didn’t know…”
“Well, since you were waiting to use the money on college tuition, there’s no reason why you would have tried to cash in your Nuveen ARS investments since last month, is there?”
“No.”
“And,” I persisted, “I bet if you go back through that mountain of unread mail you have lying around – like everybody else does – you’ll find an innocuous-looking envelope, postmarked sometime in February, from that nice man at Citi Bank. And inside that envelope, you will find a polite letter which cordially informs you that you’re totally screwed.”
“That [expletive]!” Rose exclaimed. “That [expletive] [expletive] crook!”
“Yeah,” I commiserated, “leave it to the financial wizards of Wall Street to take something as safe and stodgy as the concept of a diversified portfolio of municipal bonds and use it to invent a financial instrument as risky as a leveraged commodities option – and then sell it to the public at returns on investment not much better than a federally insured savings account.”
“I’ll kill that [expletive],” Rose shouted. “I swear, I’ll cut his [expletive] off and choke him to death with them!”
“Now, now,” I mollified, “you know you’re just using figures of speech when you say that; and, besides, people are beginning to stare at us.”
“Right – right, sorry,” Rose muttered, hanging her head in embarrassment, then assuaging that embarrassment with the remainder of her second glass of wine. “Tom,” she asked, her voice cracking slightly, “are Hank and I ever going to see that eighty thousand dollars?”
“Possibly. There’s word out that maybe, in four to six months, ARS investors will be able to get their money back.”
“What about the people who need their money before then? Like us, if Hank Jr. gets accepted at a college this summer and we need to pay his tuition in advance?”
“Ah, well, I’ve heard that the banks who sold people ARS investments are now offering to loan them money – up to fifty percent of the amount in some cases…”
“The nerve!” Rose slammed her wine glass down and began pouring a third glass, spilling a bit in the process. “The absolute nerve of those people! Have they no shame?”
“Nope.”
“Have they no decency?”
“None whatsoever.”
“Have they no conscience?”
“Rose,” I reminded her, “these are financial professionals we’re talking about.”
“Damn them! Damn them all!”
“I’m sure,” I said, patting her on the hand as she began to sob, “that if there is a God, He is going to put all those Wall Street slime balls in a very, very special part of Hell.”
Rose took out a hanky, daintily blowing her nose. “And their [expletive] lobbyists, too!”