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Foreign Correspondent
by international syndicated columnist & broadcaster Eric Margolis


24 December, 2007

NEW YORK – Western nations have been rightly scourging China for flooding world markets with toxic food, toys, nutritional products, clothing and other tainted goods. China’s government closed its eyes to this malefaction.

But meanwhile, Wall Street was exporting toxic financial instruments called sub-prime mortgages around the globe. Washington’s regulatory monkeys saw no more evil than those in Beijing.

Here’s how the sub-prime mess developed. A single mother, say in East St Louis, was peddled an initially low interest adjustable mortgage by a flim-flam broker. When rates rose sharply, she couldn’t pay and was forced to abandon the home she should never have bought to begin with. Multiply this little human tragedy by hundreds of thousands, and, voilà, the spreading sub-prime mortgage crisis.

Meanwhile, the world’s leading financial institutions built a $500 billion to $1 trillion house of cards based on these sleazy mortgages. They were bundled, chopped up like stolen cars, and peddled everywhere as secure, high-yielding American securities.

Once the sub-prime crisis broke, banks holding such `Chinese paper,’ to use an old Wall Street term, panicked. Not only couldn’t they find any more stupid buyers, the wildly inflated values they gave these securities turned out to be totally bogus. This, in turn, gravely undermined the asset base of lending institutions holding `Chinese paper.’

Britain’s Northern Rock (aka `Northern Wreck’) suffered a run on the bank and is now clinically dead. CIBC lost up to $2 billion. Two of the world’s biggest banks, Citi and UBS, lost $9 and $10 billion respectively. They nearly capsized, and had to be rescued by Gulf Arabs and Singapore. Merrill Lynch and Morgan Stanley face $9-10 billion of write-downs. More banks will soon reveal billions of losses, all thanks to `innovate finance.’

How could the brightest Wall Street’s financiers, who claim unrivaled expertise in managing client’s assets, be so stupid and incompetent?

After the flu and bad taste, few diseases are more contagious than greed. So began the greed stampede as Wall Street bulls charged into the sub-prime Valley of Death.

Blame begins with the Bush Administration. Faced with hugely expensive foreign wars and the dot com bubble, the White House got Alan Greenspan at the Federal Reserve to lower interest rates to nearly nothing. This produced the monster property bubble that is now bursting. Cheap credit became a dangerous drug, financial `speed’ arousing false economic euphoria that helped keep Republicans in power and fueled swarms of unregulated, parasitic hedge funds.

Rock bottom US interest rates made bankers and investors search out higher paying investments. Sub-prime mortgages were Wall Street’s answer. In a giant Ponzi scheme, new investor money was used to pay off old investors, building a giant pyramid that collapsed this past fall.

The US Federal Reserve, which is supposed to regulate mortgages, failed its duty. So did other US financial regulators, like Treasury and the SEC. They, and auditing firms, allowed banks to egregiously misvalue their mortgage holdings and create `conduits’ and `off balance sheet’ vehicles that were new forms of accounting fraud.

Many bankers and managers simply failed to understand the mind-numbing complexity of financial derivatives. President George Bush lauded `the new finance’ as the model of Republican economic policy. It turned out to be – the financial equivalent of Iraq. Worryingly, no one knows how much the world’s rickety financial structure now depends on these arcane financial alchemies. We enter 2008 threatened by the prospect of new financial earthquakes and recession.

Instead of facing fraud indictment, CEO’s of the big peddlers of `Chinese paper’ got millions worth of golden handshakes, or raises. While government was busy prosecuting Conrad Black over $3 million, the public was defrauded of tens of billions. No one has yet been prosecuted for these outrageous crimes.

If there was a time for government to justify its existence, it’s now. Prosecute the sub-prime fraudsters, from salesmen to CEO’s. Forget golden handshakes. They deserve steel handcuffs.

Copyright Eric S. Margolis 2007.

Published at since 1995 with permission, as a courtesy and in appreciation.

To read previous columns by Mr. Margolis: Click here

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