American Madness

Intelligent Criticism in the Service of a Better Nation




When Wall Street hurts the poor, it hurts itself

Posted by Josh Friedlander | No Comments

Wall Street Crash of 1929My friend and colleague Eric Baum is one of the few ambitiously moral people in this universe. Where for others caveat emptor is the watchword, Baum here notes that Wall Street’s recent failure to embrace the categorical imperative has meant inflicting an unforseen wound on itself.

Blowback
By Eric Baum

The Central Intelligence Agency has a term called ‘blowback’ to describe the unintended consequences of hostile actions. In financial jargon there is no term to describe such quid-pro-quo sequences, but the subprime debacle may prompt financial analysts to coin one (ed: payback?).

Hedge funds and other money managers that cater to institutional investors are running for cover amidst a credit meltdown that is now demolishing equity prices. Financial insiders know the sequence of events that produced multi-billion-dollar losses at hedge funds managed by Bear Stearns and Goldman Sachs. These insiders now expect more damage in the weeks to come.

The untold parable from what was essentially a manufactured crisis is a cautionary lesson about blowback. Wall Street firms bankrolled predatory mortgage businesses that racked up astronomical fees by brokering unsuitable loans to unsophisticated customers. The marks were usually working-class poor who lacked the resources to have attorneys pore over their contracts.

In hindsight, the fates of the rich and the poor were inexorably linked.

As mortgage contracts’ two-year introductory teaser rates are rapidly resetting at higher rates, hundreds of thousands of people (perhaps millions) will lose their homes. Conservative media pundits initially blamed low-income debtors for their stupidity and swept the matter under the rug. But the damage cannot be undone and a larger sequence of events is in motion.

Widespread defaults began to poison collateralized debt obligations – blended pools of high and low-risk debt – that sell assets to hedge funds and other institutional investors.

The media pundits who are searching for scapegoats would do well to remember this cycle started when the wealthiest investors backed moneymaking schemes to defraud their poor customers.

In the recent years leading up the subprime crisis it seemed as if the fortunes of the rich and poor had taken divergent paths. What were the foreseeable consequences for passive hedge fund investors with indirect investments in predatory lending schemes?

In hindsight, the fates of the rich and poor were inexorably linked. It doesn’t take a Harvard MBA to realize the subprime credit debacle is a severe form of blowback.

In Washington, blowback always comes as a surprise because the U.S. considers itself impervious to outside threats.

In the same vein, Wall Street never expected that as a consequence of grifting poor Americans, their own darling profit centers would become the ultimate suckers, suffering greater losses than those of their victims. The subprime debacle may have been an inadvertent response, but it proved that Wall Street does not exist in a bubble, safe from the consequences of its immoral actions.

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