Beware the Recovery Plan
December 2, 2008
If there is something good to come out
of the current mortgage and financial debacle, it is that it can’t be blamed
on common sense conservatism, the social and political outlook detested by
the profoundly "learned,” highly "experienced” aristocrats of left and
Too bad that both Democratic and Republican leaders ignore that truth.
The same goes for far too many other movers and shakers who refuse to
admit that regardless of their ideology, economic emperors of big ideas
have no clothes.
That reality explains why a headline in "The Hill” shouted, "GOP
senators hail Obama’s economic team.”
It also explains why Gail Collins (NY Times) gushed the following
thanksgiving in a recent column: "And let’s be grateful that Tim
Geithner is going to the Treasury Department. . .Thank heavens that Tim
is on the case, along with the other widely respected economists that
Obama has recruited for his team.”
So, with the nation being inundated by stupid, fawning words of praise
for people who, from 1982 to the present, were either directly
responsible for a series of insane financial policies or were too
dim-witted or too cowardly to speak out forcefully against them, what is
one to do?
Well, speak the truth, of course — which is exactly what Michael Lewis
has done in "The End” (portfolio.com), a beautifully written piece that
will inform every common sense person about the lies Wall Street sold
the nation with the help of politicians, bureaucrats, and economists.
Although Lewis doesn’t bring up the issue, his article also inoculates
devotees of common sense against the lies sure to be shoveled by Obama’s
"no change we are asked to believe in” financial recovery team (with a
lot of big-time shoveling help from Congress and Wall Street).
Now, Lewis’ excellent account about some truly intelligent, common sense
Wall Streeters who will never be nominated for Secretary of the Treasury
or appointed to the most important economic advisory posts is too long
to summarize in its entirety. Therefore, I present here only sufficient
detail to support the two claims made above.
First, however, a preface consisting of a few things I believe need to
First, Mr. Lewis is the author of the book Liar’s Poker, an
account of the greed, corruption (both moral and legal), and sheer
stupidity of Wall Street in the eighties.
Second, there is the truth that the vulgar, dangerous, and enormously
harmful excesses of Wall Street have been made possible by politicians
who passed shockingly stupid laws as well as by bureaucrats and
economists who abetted the madness or were too stupid or cowardly to
rail against it.
So it was that the Garn-St. Germain Depository
Institutions Act of 1982 made a casino of the S&L industry and later
laid hundreds of billions in debt upon us and our children. (Charles
Schumer and Steny Hoyer were co-sponsors.)
And so it was that the arrogance and greed of Wall
Street big shots led to the mad speculation and corruption that damaged
Salomon Brothers so much it had to be absorbed by Travelers in ’91
(which later merged with Citi).
However, despite that debacle, megalomaniac Wall Street
emperors as well as power and money loving politicians were undeterred.
(Remember that politicians have now twice been too
stupid to ask the question, "Is it even possible for Washington to
properly regulate a banking/investment banking/mortgage industry that is
allowed to operate like an addicted gambler?”).
So it was that Clinton signed The Financial Services
Modernization Act of 1999, a law which did away with restrictions on the
integration of banking, insurance and stock trading and thus paved the
way for a debacle that now has us looking at the eighties mess not as
small potatoes but infinitely tiny ones.
The preface completed, we can now turn our attention to
Mr. Lewis’ account of the common sense observations (and money) made by
Steve Eisman and others such as Meredith Whitney, "an obscure
analyst of financial firms for Oppenheimer Securities who, on October
31, 2007, ceased to be obscure [after] . . . she predicted that
Citigroup had so mismanaged its affairs that it would need to slash its
dividend or go bust.”
For his part, Mr. Eisman knew long before 2007 that something was truly
rotten in the state of Wall Street, as evidenced by the following quote
Lewis attributes to him: "You have to understand, I did subprime first.
I lived with the worst first. These guys lied to infinity. What I
learned from that experience was that Wall Street didn’t give a shit
what it sold.”
Indeed, by 2004, Eisman and his partners Danny Moses and Vincent Daniel
"shared a sense that unhealthy things were going on in the U.S. housing
market.” So did Ivy Zelman, a housing-market analyst at Credit Suisse,
who knew that historically the ratio of median home price to income has
been about 3 to 1 but by late 2004 had risen nationally to 4 to 1.
But what was the whole story about that ratio? Lewis quotes Ms. Zelman:
"But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was
10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the
buyers. They weren’t real buyers. They were speculators.”
How deep was the "shit” the mortgage industry was selling and the
banking industry was not just buying but turning into a Ponzi-scheme of
get-rich-quick mortgage bond derivatives that people of exceptional
talent and mathematical ability couldn’t understand no matter how hard
Lewis describes that excremental depth as follows: "In 2000, there had
been $130 billion in subprime mortgage lending, with $55 billion of that
repackaged as mortgage bonds. But in 2005, there was $625 billion in
subprime mortgage loans, $507 billion of which found its way into
Eisman not only understood those facts but also had knowledge of them
from his own experience. For example, Lewis recounts the story that the
baby nurse Eisman had hired in 1997 to take care of his twin daughters
phoned Eisman to tell him that she and her sister owned five townhouses
How could this have occurred? Lewis explains: ". . . after they bought
the first one and its value rose, the lenders came and suggested they
refinance and take out $250,000, which they used to buy another one.
Then the price of that one rose too, and they repeated the experiment.”
To inform us of the expected denouement of this sordid scheme, Lewis
lets Eisman do the plain talking: "By the time they were done, they
owned five of them, the market was falling, and they couldn’t make any
of the payments.”
Next, Lewis enlightens us about "a Mexican strawberry picker [in
Bakersfield, California] with an income of $14,000 and no English [who]
was lent every penny he needed to buy a house for $720,000.”
How are those as examples of the immoral, irresponsible, unpatriotic
rapacity of predatory lenders as well as the foolishness and greed of
people who far too often wanted to be duped?
And when those examples are multiplied by the millions and added to the
selling of junk mortgage packages and indecipherable junk mortgage bond
options that elicited only silence from Wall Street to Washington, how’s
that for evidence of the astonishing ignorance or mad ideological
insanity displayed by big shots from those at Fanny and Freddie to
Greenspan, Bernanke, Geithner, et al. to "highly experienced” politician
bigwigs in Congress?
Wall Street moguls; hotshot bureaucrats; big shot economists;
experienced, powerful, highly placed politicians — The truth is that
these learned emperors have no clothes.
For particularly frightening proof, listen to this about who knew what
regarding collateralized debt obligations or "C.D.O.’s.
Lewis reports that on July 19, 2007, Steve Eisman spoke about C.D.O.’s
on a conference call to five hundred people and another 500 who logged
on afterward to listen to a recording.
Lewis also tells us that on the same day, "Federal Reserve Chairman Ben
Bernanke told the U.S. Senate that he anticipated as much as $100
billion in losses in the subprime-mortgage market.”
What, however, did Eisman tell his listeners?
"He explained the strange alchemy of the C.D.O. and said that he
expected losses of up to $300 billion from this sliver
of the market alone” [emphases added].”
No, we won’t see Obama name someone like Steve Eisman as the
person to tell the American people what has been going on for the past
three decades and to be straight with them about how recovery is best
But what we will see is warmed over know-nothings directing enormous
giveaways, loans, and spending in conjunction with laws passed by
stupid, arrogant, corrupt politicians who have already immersed their
swilling snouts into $150 billion of rotten pork that represents a
payoff for their "economic recovery services.”
That’s why to beware Obama’s recovery plan is to acknowledge what
history has always taught us and what fundamentally made it possible for
Steve Eisman and others like him to make a lot of money by shorting
everything they could that depended upon the continuation of the housing
and mortgage boom.
The lesson is this:
Because of human nature, it will forever be true that we can only enrich
ourselves when we sell Washington short in every conceivable way we can;
for the only thing that flows out of that squalid, pretentious place is
the most repugnant, fetid, disgusting, and frightfully harmful kind of
perfectly pure bullshit.