I am so depressed. I mean, really. How could I have gotten it so wrong? I researched everything I could think of. I went to original source material. I even eschewed my normal wacko-fringe sources to avoid unintended alarmist embellishments (losing a sure source of fun and numerous humorous opportunities). I thought I did everything right.
But I was wrong.
In much the same way that as a hay-seed Seattleite I underestimated the social fortress that is the Seattle Freeze, this time I completely screwed up on the magnitude, the scale, and the complete enormity of the major challenge facing us over the next few years.
The economy.
Lemme hear you say: “groan.”
That’s right. Everything’s better. The recession is over. The economy is growing. Things are moving again in that vast hidden machine that is the bright beacon in the world’s economy. That engine of jobs. That center of capital. That driver of economic growth throughout the world.
Washington, DC.
Let’s go back to the past. As I’ve written, the cause of the underappreciated economic meltdown of 2008 was the failure of the financial institutions to understand that their own game was nothing more than a Ponzi scheme that they were selling to each other. A company – call it Bank of America – would write a mortgage to an unqualified homeowner. BOA would then sell the toxic mortgage to another company – say Merrill-Lynch – which along with all these other mortgages it had bought would package the lot of them into a Mortgage Backed Security (MBS) and sell that off to somebody else – say Lehman Brothers – who would, along with a bunch of other MBS’s would create what is known as a Collateralized Debt Obligation or CDO.
The theory went that since these MBS and CDO “bonds” were backed by something that had value, i.e. real estate, and that the historical default rate on mortgages was a known quantity, the MBS and CDO investment vehicles were the safest thing since seatbelts. If the underlying loan defaulted, then the house would be foreclosed and keep the potential of loss near zero.
They couldn’t sell them fast enough.
Then the wheels came off. First the earliest batch of shady mortgages hit their rate adjustment point and the borrowers couldn’t make the new payments. Second, the price of houses started going down across the country, all at the same time.
Enter the Credit Default Swap, AKA, oddly enough, as CDS. A CDS is basically an insurance policy against the failure of an MBS or CDO. Since these investments were largely considered fail-proof – by this time Wall Street was mixing anddrinking their own Kool-Aid – insuring these sure-bet investments seemed like what was known as “printing money.” And for a few years it was.
How a CDS works is that, for a fee (remember that word), an insurer would basically guarantee the value of your MBS or CDO. If an MBS failed to return 100 cents on the dollar, the insurance policy (CDS) would pay the difference. It was a tiny fee, because the risk was considered so low. In the run-up to 2008, more and more investors began realizing that there was a problem with the MBS model and started buying CDSs to cover the potential loss. For the most part, the company they were buying them from was the American International Group, or AIG.
On September 12, 2008 Lehman Brothers – an investment bank of some repute – told the Treasury and the Fed that it was going to have to file bankruptcy because it had so many uninsured MBSs and CDOs on its books. The U.S. response was: “Oops. That’ll teach you.” Thinking that taking a hard line with Lehman would scare the other risk-packed banks into upgrading their portfolios they let Lehman fail and go out of business. This knocked the price of CDOs, etc. into what is known as “the toilet” but did not, in fact, scare all the banks.
Which is when AIG tapped the Feds on the shoulder and told them who was really on the hook for all the CDS insurance policies.
You.
It turned out that AIG needed something along the lines of twenty-eight billiondollars by Tuesday to cover their obligations to all the investors that had paid them for the CDS protection. If AIG were unable to pay the CDS installments, all the other banks would end up following Lehman into the annals of history.
So the government bellied up to the bar and started shelling out billions and billions and billions to banks, investment houses, investors, insurance companies, car companies, and credit companies.
It was the largest transfer of wealth in history.
A transfer that is ongoing, except that now it’s not AIG on the hook for forty billion a month in MBSs a month. It’s the Fed.
The whole mess began in 1999 when Bill Clinton signed into law the legislation repealing the Glass-Steagall act of 1933 which regulated commercial banks. One of the things that it prevented was banks having their own investment departments; they couldn’t make investments on their behalf using your money. The repeal, which was overwhelmingly supported by Republicans and Democrats alike, removed that restriction and the banks went nuts; all resulting in an economy that is dependent on the government shoveling money into the banks’ vaults.
So much for the lessons of history.
For them.
But for you and me, not so much. Because it’s now possible to out-bank the banks.
In pre-Clinton times the banks made their profit by taking your money, paying you interest, and then lending the money out at a higher rate of interest. Their profit was the spread in rates. Upon the repeal of Glass-Steagall the banks could start earning more money than you can imagine while paying you basically nothing in return. But with the economy a smoldering wreck, everyone was so scared that they couldn’t give money away. The banks couldn’t earn anything by making loans so they upped their fees.
Now there are fees for everything. Checking fees, ATM fees, using a human teller fees, credit card fees, and – my personal favorite – overseas transaction fees for purchases in U.S. dollars, just because the company is headquartered outside the U.S. It’s enough to make your head swim.
But there is a way to profit on your own account from all these fiscal shenanigans.
Because of the bad press the banks are always getting they will do anything to keep you from going onto Facebook and writing “Bank of America Sucks!!!!” on their page. Plus, since nobody not on Wall Street has any money, they are desperate to keep as many customers as they can. By working these two facts you can pick up a few bucks from time-to-time.
The thing about the fees is: you don’t have to pay them. In fact, if you can be nice on the telephone, you can get the banks to pay you.
For example, two and a half years ago, when I went to meet the Zombies of Costa Rica, I acquired a United Airlines (then Continental) Mastercard so I could score some free miles. Despite my amazement at them granting credit to an out-of-work, zero-net-worth, just-back-from-the-Caribbean, 47%-member bum such as myself, I snatched up the 25,000 free miles. The only problem was that after the first year the card cost $85 a year to have.
Yeah, right.
This past March I got my statement showing the $85 fee so I got on the phone.
“Cancel my card.”
“But.”
“Cancel it. You usurious bastards make enough money when I use the card and I’m not paying you a dime more.”
“Okay, we’ll give you 5,000 miles credit.”
“Cancel it.”
“We’ll give you a $50 credit.”
“Cancel it.”
“We’ll give you a $100 credit!”
Ca-ching.
“Deal.”
For my five-minute phone call, I ended up making fifteen bucks, which is $180 per hour or an annual rate of return of 18%. Plus I still get the two free club passes ($100), free baggage ($25/flight), and priority boarding.
Back in January I got a letter in the mail from Chase Bank.
“Open a new account and we’ll give you $200!”
Beats a toaster.
I checked the fine print: give them $100, let them keep it for six months and pay them their $10 a month account fee. There was no stipulation about actually using the account. Fifteen minutes later I had filled out the form and they had my C-note. This past week I closed the account and they sent me a check for $260 (they only charged me four months of fees). That’s a profit of $160, which works out to $640 an hour, or a rate of return of 320%!
Which is what I call interest.