Too Big to Fail. Too Big to Fail. (Show Video)

Transcription

1 Too Big to Fail (Show Video) 1

2 How did this Happen? 2

3 How did this happen? Structured finance defined: a process involving the complex computer modeling of debt risk, the diversification of borrowers on the basis of geography, income levels, and types of loans handed out. The endless trough: Government presses organizations to increase home ownership Debt rating agencies collect high fees for ranking CDOs at AAA rated House with subprime mortgage with no money down Bond insurance in the form of a credit default swap Mortgage Co that collects high fees and approves loan Mortgage Co sells mortgage to investment bank Investor feasts off the mortgage debts high interest rates Investment bank packages debt into CDOs In 2007: $60B bonuses doled out 3

4 How did this happen? 1. In 2008, this house of cards collapsed. 2. $2 Trillion in invested capital lost 3. Triggering the great recession 4. Millions of jobs lost 5. Moral Hazard for companies that were too big to fail Government presses organizations to increase home ownership Debt rating agencies collect high fees for ranking CDOs at AAA rated House with subprime mortgage with no money down Bond insurance in the form of a credit default swap Mortgage Co that collects high fees and approves loan Mortgage Co sells mortgage to investment bank Investor feasts off the mortgage debts high interest rates Investment bank packages debt into CDOs In 2007: $60B bonuses doled out 4

5 The case of Jose Estronza in Corum, NY Worked as a hospital orderly making $30K/year Jose Estronza Corum, NY His mortgage application modified by an agent of CitiBank to reflect $70K income and $30K in savings. Both a lie. Loan officer and real estate attorney worked for the contractor forged documents with high fees embedded into the loan. Fed the trough of mortgage backed bonds 5

6 Agents of Debt Jimmy Cayne CEO of Bear Sterns A leader among the merchants of Debt 1992 to 2006: Tens of millions per year income. Left work often to play bridge Sponsored debt under writing for Government sponsored finance companies (Fannie Mae and Freddie Mac) Debt under writing vastly expanded as US Government pushed to increase home ownership from 60% to 70%. Smoked pot in his office CNBC named one of the "Worst American CEOs of All Time" 6

7 Agents of Debt Lehman Brothers founded in 1850 Employed tens of thousands of folks Survived the Civil War, WW1, and WW2 Nick named the Gorilla Led a cult following Bleed Lehmann Green In 2006, earned $40M with a net worth of $500M. a $21M Park Ave home in NYC + $13M vacation home. Dick Fuld CEO of Lehmann Brothers Used accounting tricks to keep investors confused some called these complex securities financial alchemy. Leveraged to 38 to 1 to finance trading of complex securities Quote from one trader regarding CDOs: What is the worst that can happen, we make $200 million and then we get fired 7

8 How did this happen? Began sounding alarm bells in 1992 Highly complex bonds were not properly disclosed and not enough cash on hand to cover accounts if things got bad. Scheme called for lots of interconnected liabilities Financial engineering was the dominant business model. Not making things but more $ to be made in Financial manipulation. E. Gerald Corrigan Head of NY Federal Reserve Bank. 1994: Mortgaged backed securities called a monstrously global electronic Ponzi scheme 8

9 Economic Pollution: As defined by David Cay in his book: Free Lunch The growing array of businesses and whole industries that profit by dumping the real costs of capital, equipment, and even labor, onto taxpayers Non-valued added business activity? Merely cost shifting. Examples: 1. Home security systems 2. Large box stores that open only with local tax subsidies 3. Mortgage under writing where the federal government (you and me) assumes the risk 9

10 How did this happen? Herbert Spencer (April 1820 to December 1903) 10

11 How did this happen? Spencer s ramblings regarding the natural law of business: (As quoted to The Paradox of American Capitalism by David F. Prindle) Attacking the pro labor advocates: Blind to the fact that under the natural order of things society is constantly excreting its unhealthy, imbecile, slow, vacillating, faithless members, these unthinking, though well meaning, mean advocate an interference which not only stops the purifying process, but even increases the vitiation (hope, support) absolutely encouraging the multiplication of the reckless and incompetent by offering them an unfailing provision. 11

12 How did this happen? We meet in the midst of a nation brought to the verge of moral and political ruin. Corruption dominates the ballot box,... Businesses prostrate; our homes covered with mortgages, labor impoverished, and the land concentrating in the hands of capitalists.... The fruits of the toil of millions are boldly stolen to build up colossal fortunes for the few, unprecedented in the history of the world. From the same prolific womb of governmental injustices, we breed the two great classes-tramps and millionaires. As quoted to The Paradox of American Capitalism by David F. Prindle Ignatius Donnelly Peoples Party Platform

13 How did this happen?... The range of vision by major parties has been bounded by the horizons of property and enterprise... They have accepted the economic virtues of capitalistic culture as necessary... And a culture that is intensely nationalistic. This results in: 1. Encouragement of enormous fortunes along side desperate poverty 2. A nationalistic acceptance of war and preparations for war 3. The Power Party (who ever is in office at the time) never going beyond that vision Richard Hofstadter The American Political Tradition As quoted in The People s History of the United Sates by Howard Zinn 13

14 Page 14 Ecclesiastes chapter 2 and 12 Chapter 2 vs. 4 to 11: 4 I undertook great projects: I built houses for myself and planted vineyards. 5 I made gardens and parks and planted all kinds of fruit trees in them. 6 I made reservoirs to water groves of flourishing trees. 7 I bought male and female slaves and had other slaves who were born in my house. I also owned more herds and flocks than anyone in Jerusalem before me. 8 I amassed silver and gold for myself, and the treasure of kings and provinces. I acquired men and women singers, and a harem as well the delights of the heart of man. 9 I became greater by far than anyone in Jerusalem before me. In all this my wisdom stayed with me. 10 I denied myself nothing my eyes desired; I refused my heart no pleasure. My heart took delight in all my work, and this was the reward for all my labor. 11 Yet when I surveyed all that my hands had done and what I had toiled to achieve, everything was meaningless, a chasing after the wind; nothing was gained under the sun. Chapter 12 vs : 13 Now all has been heard; here is the conclusion of the matter: Fear God and keep his commandments, for this is the whole duty of man. 14 For God will bring every deed into judgment, including every hidden thing, whether it is good or evil. 14

15 Page 15 Luke 12:16-21 The Parable of the Rich Fool 16 And he told them this parable: "The ground of a certain rich man produced a good crop. 17He thought to himself, 'What shall I do? I have no place to store my crops.' 18"Then he said, 'This is what I'll do. I will tear down my barns and build bigger ones, and there I will store all my grain and my goods. 19 And I'll say to myself, "You have plenty of good things laid up for many years. Take life easy; eat, drink and be merry." ' 20"But God said to him, 'You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?' 21"This is how it will be with anyone who stores up things for himself but is not rich toward God." 15

16 1 Peter 3:15 moment: 1. Intelligence and understanding is required 2. Understand what is economic pollution 3. Going beyond that conventional vision 16

17 Part 2 17

18 Page 15 Luke 20 - The Parable of the Tenants 9... A man planted a vineyard, rented it to some farmers and went away for a long time. 10 At harvest time he sent a servant to the tenants so they would give him some of the fruit of the vineyard. But the tenants beat him and sent him away empty-handed. 11 He sent another servant, but that one also they beat and treated shamefully and sent away empty-handed. 12 He sent still a third, and they wounded him and threw him out. 13 Then the owner of the vineyard said, What shall I do? I will send my son, whom I love; perhaps they will respect him. 14 But when the tenants saw him, they talked the matter over. This is the heir, they said. Let s kill him, and the inheritance will be ours. 15 So they threw him out of the vineyard and killed him. What then will the owner of the vineyard do to them? 16 He will come and kill those tenants and give the vineyard to others. When the people heard this, they said, God forbid! 17 Jesus looked directly at them and asked, Then what is the meaning of that which is written: The stone the builders rejected has become the cornerstone? 18 Everyone who falls on that stone will be broken to pieces; anyone on whom it falls will be crushed. 18

19 Page 14 Ecclesiastes chapter 2 and 12 Chapter 2 vs. 4 to 11: 4 I undertook great projects: I built houses for myself and planted vineyards. 5 I made gardens and parks and planted all kinds of fruit trees in them. 6 I made reservoirs to water groves of flourishing trees. 7 I bought male and female slaves and had other slaves who were born in my house. I also owned more herds and flocks than anyone in Jerusalem before me. 8 I amassed silver and gold for myself, and the treasure of kings and provinces. I acquired men and women singers, and a harem as well the delights of the heart of man. 9 I became greater by far than anyone in Jerusalem before me. In all this my wisdom stayed with me. 10 I denied myself nothing my eyes desired; I refused my heart no pleasure. My heart took delight in all my work, and this was the reward for all my labor. 11 Yet when I surveyed all that my hands had done and what I had toiled to achieve, everything was meaningless, a chasing after the wind; nothing was gained under the sun. Chapter 12 vs : 13 Now all has been heard; here is the conclusion of the matter: Fear God and keep his commandments, for this is the whole duty of man. 14 For God will bring every deed into judgment, including every hidden thing, whether it is good or evil. 19

20 How did this happen? Structured finance defined: a process involving the complex computer modeling of debt risk, the diversification of borrowers on the basis of geography, income levels, and types of loans handed out. The endless trough: Government presses organizations to increase home ownership Debt rating agencies collect high fees for ranking CDOs at AAA rated House with subprime mortgage with no money down Bond insurance in the form of a credit default swap Mortgage Co that collects high fees and approves loan Mortgage Co sells mortgage to investment bank Investor feasts off the mortgage debts high interest rates Investment bank packages debt into CDOs In 2007: $60B bonuses doled out 20

21 Judges 2 1 The angel of the LORD went up from Gilgal to Bokim and said, I brought you up out of Egypt and led you into the land I swore to give to your ancestors. I said, I will never break my covenant with you, 2 and you shall not make a covenant with the people of this land, but you shall break down their altars. Yet you have disobeyed me. Why have you done this? 3 And I have also said, I will not drive them out before you; they will become traps for you, and their gods will become snares to you. 8 Joshua son of Nun, the servant of the LORD, died at the age of a hundred and ten. 9 And they buried him in the land of his inheritance at Timnath Heres in the hill country of Empraim, north of Mount Gaash. 10 After that whole generation had been gathered to their ancestors, another generation grew up who knew neither the LORD nor what he had done for Israel. 11 Then the Israelites did evil in the eyes of the LORD and served the Baals. 12 They forsook the LORD, the God of their ancestors, who had brought them out of Egypt. They followed and worshiped various gods of the peoples around them. They aroused the LORD s anger 13 because they forsook him and served Baal and the Ashtoreths. 14 In his anger against Israel the LORD gave them into the hands of raiders who plundered them. He sold them into the hands of their enemies all around, whom they were no longer able to resist. 15 Whenever Israel went out to fight, the hand of the LORD was against them to defeat them, just as he had sworn to them. They were in great distress. 21

22 Burial place of Joshua 22

23 Statue of Baal From the 15 th to 14 th century BC 23

24 Judges 2 20 Therefore the LORD was very angry with Israel and said, Because this nation has violated the covenant I ordained for their ancestors and has not listened to me, 21 I will no longer drive out before them any of the nations Joshua left when he died. 22 I will use them to test Israel and see whether they will keep the way of the LORD and walk in it as their ancestors did. 23 The LORD had allowed those nations to remain; he did not drive them out at once by giving them into the hands of Joshua. 24

25 1620 The Mayflower Compact How we got our start... Having undertaken for the Glory of God, and Advancement of the Christian Faith, and the Honour of our King and Country, a voyage to plant the first colony in the northern parts of Virginia; do by these presents, solemnly and mutually in the Presence of God and one of another, covenant and combine ourselves together into a civil Body Politick, for our better Ordering and Preservation, and Furtherance of the Ends 25

26 Credit and Housing Bubble 2002 to present Greed, easy credit and unrealistic expectations fueled massive speculation in housing and real estate. From 1776 to 2003, total mortgage debt in U.S. grew by $3.8 trillion. From 2003 to 2005, total mortgage debt in U.S. grew by $3.4 trillion. The Liar loan and the NINAP mortgage Complex financial instruments sold and then resold to investors year old financial institutions ruined and trillions dollars lost 26

27 A look at the top 75 most wealthy in all of human history: (net worth calculated in current US dollars and measured in $Billions) (Source: Outliers by Malcolm Gladw150ell 2008) Rank Name Wealth When Country #1 John D. Rockefeller $318B US Industrial Rev 1800s USA Standard oil #2 Andrew Carnegie $298B US Industrial Rev 1800s USA-Steel #3 Nicholas II of Russia $255B Kingdom before 1918 Russia #4 William Vanderbilt $232B US Industrial Rev 1800s USA Railroad #5 Oman Ali Khan $211B 1911 and 1948 India #6 Andrew Mellon $188B US Industrial Rev 1800s USA-Gulf Oil #7 Henry Ford $188B US Industrial Rev 1900s USA-Autos #8 Marcus Crassus $169B 115 BC to 53 BC Roman Empire #10 Cornelius Vanderbilt $167B US Industrial Rev 1800s USA-Railroad #14 William II of England $151B Monarchy ( ) England #17 Sam Walton $128B Modern times USA-Wal-Mart #21 Cleopatra $96B Ancient Egypt Egypt #37 Bill Gates $58B Modern times USA-Microsoft $41 Warren Buffett $52B Modern times USA-Investments 27

28 Page 16 1 Timothy 6: But godliness with contentment is great gain. 7 For we brought nothing into the world, and we can take nothing out of it. 8 But if we have food and clothing, we will be content with that. 9 People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. 10 For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs. 28

29 Interesting facts: 1. Of the top 75 most wealthy people in all of human history, fourteen are Americans born within nine years of one another in the mid 1800s the start of the American Industrial revolution 2. Mostly likely will never happen again 3. Who we are is a function of where we were 29

30 Only a tool for exchange for public and private debts 30

31 Established by 1782 resolution The Seal Explained 13 layers of blocks to refer to the 13 original states. MDCCLXXVI (1776) in Roman numerals. Eye of Providence watches over an un-built pyramid Annuit Cœptis = Latin for Providence has approved of (our) undertakings. Novus Ordo Seclorum = Latin for "a new order of the ages." Unfinished pyramid = continuous progress 31

32 $388K per year = 1% of the US Families with income = $150K per year are the top 5% wage earners in the US $45K per year, top 10% wage earner of the entire World 2 billion people live on less than $2 per day. Keep $ perspective 32

33 Page 18 You can pursue your individual passion and maintain a biblical world view/christ centered existence. Wealth is not a goal or an end state. We become whole when we extend ourselves beyond our individual rational self interests. 1 Peter 4:10: Each one should use whatever gift he/she has received to serve others, faithfully, sharing Gods grace in many forms. Wealth is a gift from God and the product of industry, ambition, character, and untiring effort and results in the increase of knowledge, the encouragement of science, the expansion of our liberties, and the widening of our culture. We are the only species on earth that consumes more than what we need. Time and time again, we are reminded that a culture of greed is like chasing after the wind; nothing to gain under the sun. 33

34 Page 18 Backup Slides 34

35 Technology/internet Bubble 1995 to 2002 Greed and Internet fueled massive speculation. Sensational stories as Wall Street analysts duped a generation of investors I win and you lose Pump and Dump designed to exploit individual investors. In 1996, start of technology bubble called irrational exuberance Runaway stock prices and rampant speculation through Many Investors ruined during the sell-off with trillions of dollars drained from the economy Company launch in Company was broke in 9 months 35

36 Is all wealth bad? Excerpts from a speech given by President Calvin Coolidge to the American Society of Newspaper Editors in 1925: After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world. I am strongly of the opinion that the great majority of people will always find these the moving impulses of our life.... wealth is the product of industry, ambition, character, and untiring effort. In all experiences, wealth is the multiplication of schools, the increase of knowledge, the dissemination of intelligence, the encouragement of science, the expansion of our liberties, and the widening of our culture. Of course, the accumulation of wealth cannot be justified as the chief end of existence. 36

37 How did this happen? Andrew Carnegie in 1889: (As quoted to The Paradox of American Capitalism by David F. Prindle) The price which society pays for the law of competition, like the price it pays for cheap comforts and luxuries, is... great, but the advantages of the law are greater still.. While the law may be sometimes hard on the individual, it is best for the race, because it ensures the survival of the fittest in every department. We accept and welcome therefore, as conditions to which we must accommodate ourselves, great inequality of environment, the concentration of business, industrial and commerical, in the hands of a few, and the law of competition between these as being not only beneficial, but essential for the future progress of the race 37

38 Was the explosive growth and subsequent fall worth it? For many the answer is no. Credit and Housing Bubble 2000 to Present Technology Bubble 1995 to

39 GREED IN OFTEN REVEALED DURING SPECULATIVE BUBBLES Credit and Housing Bubble 2000 to Present Technology Bubble 1995 to 2002 Speculative bubble = Historical run-up in investment instruments where the value of investment instruments have more impact on the economy than the economy has on the value of investment instruments 39

40 How did this happen? We meet\ in the midst of a nation brought to the verge of moral and political ruin. Corruption dominates the ballot box,... Businesses prostrate; our homes covered with mortgages, labor impoverished, and the land concentrating in the hands of capitalists.... The fruits of the toil of millions are boldly stolen to build up colossal fortunes for the few, unprecedented in the history of the world. From the same prolific womb of governmental injustices, we breed the two great classes-tramps and millionaires. As quoted in the Paradox of Democratic Capitalism By Ignatius Donnelly Peoples Party Platform