James Petras: The Great Financial Crisis

Petras almost always has interesting analyses but he certainly can't beat that Palm Beach banker:
as one prominent banker in
Palm Springs told me "Nobody knows who's got a turd (worthless
investments) in his brief case.






/CounterPunch.org/ 8/25/07


The Great Financial Crisis


By JAMES PETRAS

All the major financial analysts claim the ongoing and deepening
financial crisis is in large part the result of investor uncertainty.
This is because the investment banks, derivatives and hedge funds
placed
high risk, sub-prime mortgages and junk bonds, along with other more
reliable debt paper into packages and sold them to institutional and
private bankers who in turn 'retailed' them around the world.

The rating agencies, who are paid by the sellers, all gave top billing
(AA, AAA) to these hybrid securities, mortgages and junk bonds,
encouraging investment advisers to push them on to risk-averse client
looking for higher returns than Treasury notes. Most of the investors
do
not know whose and what paper they are holding, nor how much their
hedge
funds are losing or have lost. Those who can, have pulled out. The
banks
are reticent to loan to any applicant. Leverage funds are a dirty word
among lenders. Hedge funds are either selling assets to pay loans or
not
telling what they own or owe. Derivatives have been deflowered. Central

Banks in the US, Japan and the European Union have poured (and keep
pouring) over $250 billion to the private banks hoping to create
liquidity but the banks won't lend--because, as one prominent banker in

Palm Springs told me "Nobody knows who's got a turd (worthless
investments) in his brief case."

Meanwhile, Goldman Sach, Bear Stearns and Lehman Brothers are all
closing down bankrupt investment funds or trying to prop them up. The
Fed props up all the worst speculators in the name of 'saving the
financial system' - in a way that it would never prop up the failing
American health system. The financial system has the 'runs' and
infusions of Fed funds have failed to block the 'run for cover'.

"Everybody for himselfand don't look back', is the watchword of leading

equity bankers. The Democrats are calling for the usual inconsequential

Congressional hearings about what went wrong. Congressmen Levin and
Barney Frank will ask the wrong questions to the wrong people--going
after the weakest fall guys--the rating agencies--for overrating the
fraudulent deals, not the dealmakers themselves. The 'turds' in the
briefcases are big and smelly but no one knows how big: $250 billion or

$500 billion. There are a lot of bankers and hedge fund billionaires
walking around with invisible clothespins on their noses.

Where is Greenspan, since he started the whole scam with his low
interest, deregulated financial markets? The homely hero of all
hedge-derivatives-innovative financial scamsters sanctioned, approved
and promoted the pyramid swindles. He's off advising Deutsch Bank and
suckering the international bankers for $100,000 fees for his failed
financial recipes. But for those speculators who made a bundle and
left,
Greenspan is not part of the emerging turd culture. For them he is
still
the financial genius who made their fortunes.

So unless the fund directors come clean, empty their brief cases and
open their balance sheets we won't know who are carrying the turds: The

great unknowns include the unredeemable bonds, the worthless mortgages
and the illiquid hedge funds. Without knowledge of the size and scope
of
the turds, the great uncertainty has frozen most investments and
loans--it is paralyzing the financial system. Even Fannie Mae and
Freddie Mac (the federally-funded mortgage companies) can't come in and

buy up the 'turds' (otherwise known as 'bad debts'), no matter how many

hundreds of billions of US taxpayers' money they are willing to spend.

All the financial wizards, the super-smart scientific, mathematical,
guaranteed 30% per year investment advisers have less credibility than
a
street corner con man. The most arrogant, pretentious, scientific
speculators have been humbled; especially those oracles who practiced
what is call among the insiders as 'Quantitative investment'.

Quantitative investing (QI), the use of complex computer models in
making investment decisions, was used and promoted by some of the
reputedly smartest and highest regarded 'gurus' of Wall Street. For a
decade the complex mathematical modeling produced extraordinary profits

for Renaissance funds, Goldman Sachs and numerous other asset managers
and hedge funds. With the massive sell-offs of assets to pay debts and
the desperate drive for liquidity, all the assumptions of the QI went
out the window. "The Model" cannot account for any crisis which calls
into question 'historical trends'. The best and the brightest are
baffled. At first, the QI geniuses said the crisis was a localized
problem for the sub-prime bottom-dwelling speculators. But as their own

funds dropped they blamed hysterical investors who over-reacted. "A
problem of perceptions", they psychologized. But their funds continued
to decline: the Market wasn't acting as their 'model' dictated. Hearsay

flourished, skeptics surged.

"What's the problem: The Market or the Model?", one QI practitioner
asked his colleagues.

The answer from the Market: "It's the model stupid: All the QI use
historical models that extrapolated past patterns into the future as if

capitalism is a crisis-free system which changed incrementally and in
which investors borrowed rationally to leverage purchases in line with
their capacity to pay back any losses. That's Main-Street folklore for
retail brokers and the daily fare of American Enterprise ideologues."

Scientific mathematical modeling in the Great Casino predictably turned

out to be as fallible as numerology spun by Shamans to explain the life

cycle.

No one's going out of the window of the upper stories of high rise
offices--yet. What's keeping the suicide rate down is precisely what's
keeping investors running: no one knows how many hundreds of billions
in
worthless paper is being held. With the demise of the mathematical
modeling speculative science, we are now in the period of the Mystical
Black Hole. The big investment houses and hedge funds are holding back
on revelations, hoping that investment confidence will return if
investors are kept in the dark about how much they lost. This is a step

below Voodoo Economics. How can investor confidence return if they
don't
know if the big turds are in the briefcase of the Renaissance Funds,
Goldman Sachs, First Quadrant or any one or all of a thousand and one
Ali Baba hedge funds?

Let them lose their pants, writes orthodox Market pundits like Marty
Wolf in the /Financial Times/. "In order to value risk, they should
lose
properly. To bail them out", they argue, "is a moral hazard." Meaning
of
course, that if the hype and scam speculators are covered by a Federal
Bank bail out, they lose nothing, and will repeat swindling in the
future. Bailouts are a formula for financial scam recidivism. So much,
alas, for the advice of orthodox market experts. European Central Banks

and the US Federal Reserve know what class they represent: Real
existing
speculator plungers, not textbook risk-calculating value-oriented
entrepreneurs, are their reference group. The risk of letting the bad
boys sink is that there are too many of them, working in most of the
most powerful investment houses, managing too many funds, for the most
powerful financiers.

"There are no good financiers and bad speculators", one philosophically

inclined fund manager (who is likely carrying a turd) put it, "We are
all in this together, if we sink so does the whole financial system."
Is
this a self-interested plea for financial solidarity, a closet Marxist
or a prophet of doom? Nobody knows till we delve into the Black Hole of

the financial crisis. That won't happen till the brief cases open.

/James Petras, a former Professor of Sociology at Binghamton
University,
New York, owns a 50 year membership in the class struggle, is an
adviser
to the landless and jobless in Brazil and Argentina and is co-author
of/
Globalization Unmasked/ (Zed). His new book with Henry Veltmeyer,
/Social Movements and the State: Brazil, Ecuador, Bolivia and
Argentina/, will be published in October 2005./
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