On a daily basis 1,000 times more money is traded on the world's bond markets than in the goods and services bought and sold by all the nations of all the world. In other words if you added up the entire trade in oil, cars, wheat, coffee, fruit, vegetables, minerals, fuel, manufactured goods and human labour it would still not amount to 0.1% of the finance capital slushing around the money markets.
And the bond markets in particular are scrutinised as never before in Michael Lewis's fascinating new book 'The Big Short'. The staggering truth behind the 2008 financial collapse is unveiled as an uncomplicated tale of greed, recklessness, deception and bullying. Michael Lewis, himself a successful trader turned author, strips away the complicated financial products and practices to reveal the simple and inescapable truth behind Wall Street that 'the people who have the gold write the rules'. The self styled 'Masters of the Universe' as they rather modestly described themselves thrived not in a free market but an utterly corrupt and woefully unregulated casino economy. He patiently reveals how huge institutional investors like pension funds, merchant banks and governments trade trillions and trillions of dollars. This is a world where a single bond trader can 'earn' 47million dollars a year and another can lose $9billion dollars in a single transaction. This is the world the richest men inhabit, people like Warren Buffet and George Soros, where financial 'products' like 'credit default swaps' and 'collateralised debt obligations' are invented to gamble ever more greedily on every possible permutation of the financial markets.
Lewis superbly explains the essential greed behind the subprime mortgage scandal which led to the collapse of 'Masters of the Universe' like Lehman Brothers, Bear Sterns, Merrill Lynch and AIG the world's biggest insurer. He shows how the CEO's of these merchant banks hadn't the first idea about the where their mega profits came from and cared even less just as long as their obscene commissions kept pouring in. They gambled on the 'certainty' that house prices in the US would rise in perpetuity. So crazy had their system become that by the end Goldman Sachs was even betting against itself. One half of the company was selling 'credit default swaps', in effect insurance policies against mortgage repayment failures to the other half and the CEO's were delighting in announcing the record profits made from commissions on every trade. Their clients or investors meanwhile were losing trillions as these defaults swaps went 'toxic'.
Lewis outlines the utter contempt which Wall Street has for working class people and for government bodies charged with regulating the bond markets in any way. He offers a brilliant insight into the logic of 'subprime mortgages' themselves. Strange as it seems they were initially designed to supply credit to 'the little guy' in America those whose only access to credit was at punitive rates companies like Provident over here provide. But the greed in this 'philanthropy' quickly took over and the consequences were unbelievable. Lewis cites the example of Long Beach Savings [Building Society] who loaned $724,000 to a Mexican strawberry picker in Bakersfield California to buy a house despite the fact he was earning just $14,400 a year. The mortgage broker would then advise the poorly paid strawberry picker that he could 'opt' for the 'teaser' rate which allowed him to spread repayments out over 50 years and even defer the interest payments due in the first 2 years by simply adding them onto the capital sum borrowed. So the initial $724,000 loaned would rise to $813,000 at the end of year two[724,000 plus 6% for year one and 6% for year two]. The 'teaser' rate of 6% of course rose to 11% after 2 years but they didn't highlight that small print much! You can see where this transaction was headed but Wall Street, mesmerised by rising US house prices, reasoned that even if the strawberry picker couldn't make the repayments he could still sell the property and walk away unscathed. At least that was the theory! When house prices fell in 2007 just as the famous teaser rates disappeared well hey presto, it was armageddon for Wall Street. And yet in many ways the collapse of the mortgage bond market invented by Salomon Brothers was the least of it. It was the 'credit default swaps' - essentially insurance policies that covered the threat that the borrower would fail to make repayments - which made the collapse 1,000 times worse. But why on earth would anyone be foolish enough to insure against the risk of mortgage payment failure by Californian strawberry pickers for example? You might well ask! Step forward the world's biggest insurance company AIG [known to all football fans as Manchester United's shirt sponsor]. AIG were assured by Goldman Sachs, one of the world's most prestigious merchant banks, that these loans were triple A rated with 'cast iron guarantees' they couldn't fail. So in those circumstances AIG were only too keen -and greedy- to take insurance premiums on that basis. Of course it turned out that the ratings agencies Moody's and 'Standard and Poor' had no idea what they were assessing because the 'Masters of the Universe' would not let see these towers of mortgage bonds. In fact 95% were 'delinquent' i.e. virtually worthless. By the time AIG worked this out their goose was cooked!
As every socialist on the planet now knows the collapse of western capitalism was only staved off by the intervention of capitalist governments like New Labour. Gordon Brown poured in unheard of sums on money to bail out these 'Masters of the Universe' and they did so because the politicians belong to the bankers too. Like Don Corleone says these politicians he owns' like so many nickels and dimes'. Those who have the gold continue to write the rules. And a mere General election changes none of them!
* THE BIG SHORT-Inside the Doomsday Machine' By Michael Lewis. Published by Penguin