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[We used to say] “The commissions on structured products are
so huge, let™s jam it.” [Note “jam it” means foist it on the
customer.] It™s all about the ˜commish™. The commission on
structured product is gigantic. I could make a fortune ˜jamming
that crummy paper™ but I had a degree of conscience”what a
shocker! We used to regulate people but they decided during
the Reagan revolution that that was bad. So we don™t regulate
anyone anymore. But listen, the commission in structured
product is so gigantic. . . . First of all the customer has no idea
what the product really is because it is invented. Second, you
assume the customer is really stupid; like we used to say about
the German bankers, ˜The German banks are just Bozos. Throw
them anything.™ Or the Australians, ˜Morons.™ Or the Florida
Fund [ha ha], “They™re so stupid, let™s give them Triple B” [junk
grade]. Then we™d just laugh and laugh at the customers and
jam them with the commission. . . . Remember, this is about
commissions, about how much money you can make by jamming
stupid customers. I™ve seen it all my life; you jam stupid
customers.”13
Greed has been fostered not only by the repeal of the Glass-Steagall
Act but by the corporate structure itself. Traders and management
can hide behind the “corporate shield,” walking away with huge
bonuses and commissions while the company is dissolved in
bankruptcy. Angelo Mozilo, the CEO of Countrywide, is expected to
leave the corporation with about $50 million, after virtually
bankrupting the company and a horde of borrowers and investors
along with it.14 The current unregulated environment parallels the
abuses of the 1920s. Journalist Robert Kuttner testified before the House
Committee on Financial Services in October 2007:
Since repeal of Glass Steagall in 1999, after more than a decade
of de facto inroads, super-banks have been able to re-enact the
same kinds of structural conflicts of interest that were endemic
in the 1920s ” lending to speculators, packaging and securitizing
credits and then selling them off, wholesale or retail, and

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extracting fees at every step along the way. And, much of this
paper is even more opaque to bank examiners than its
counterparts were in the 1920s. Much of it isn™t paper at all,
and the whole process is supercharged by computers and
automated formulas.
Unlike in the 1920s, the financial system is now precariously
perched atop $681 trillion in derivatives dominoes, which will come
crashing down when the gamblers try to cash in their bets. The betting
game that was supposed to balance and stabilize markets has wound
up destabilizing them because most players have bet the same way ”
on a continually rising market. Kuttner said:
An independent source of instability is that while these credit
derivatives are said to increase liquidity and serve as shock
absorbers, in fact their bets are often in the same direction ”
assuming perpetually rising asset prices ” so in a credit crisis
they can act as net de-stabilizers.15
The lenders gambled that they could avoid liability by selling risky
loans to investors, and the bond insurers gambled that they would
never have to pay out on claims. That was another of Cramer™s rants:
unlike car insurers or home insurers, the all-important bond insurers
do not have the money to pay up on potential claims . . . .

Insurers That Bet They Would Never Have to Pay

While media attention was focused on the French “rogue trader”
incident, what really drove the market™s plunge in late January 2008
was the downgrade by one rating agency (Fitch) of one of the
“monoline” insurers (Ambac) and the threatened downgrade of
another (MBIA). 16 The monolines are in the business of selling
protection against bond default, lending their triple-A ratings to
otherwise risky ventures. They are called “monolines” because
regulators allow them to serve only one industry, the bond industry.
That means they cannot jeopardize your fire insurance or your health
insurance, only the money you or your pension fund invests in “safe”
triple-A bonds. The monolines insure against default by selling “credit
default swaps.” Basically, they insure by taking bets. Credit default
swaps enable buyers and sellers to place bets on the likelihood that
loans will go into default. 17 The insurers serve as the “risk
counterparties,” but they don™t actually have to ante up in order to
play. They just sit back and collect the premiums for taking the risk
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Postscript

that some unlikely event will occur. The theory is that this “spreads
the risk” by shifting it to those most able to pay “ the insurers that
collect many premiums and have to pay out on only a few claims.
The theory works when the event insured against actually is unlikely.
It works with fire insurance, because most insureds don™t experience
fires. It also works with munipical bonds, which almost never default.
But the monolines made the mistake of insuring corporate bonds
backed by subprime mortgages. The catastrophe insured against was
a collapse in the housing market; and when it occurred, it occurred
everywhere at once. Investments everywhere were going up in flames,
“spreading risk” like a computer virus around the world.
According to a 2005 article in Fortune Magazine, MBIA claimed
to have “no-loss underwriting.” That meant it never expected or
intended to have to pay out on claims. It took only “safe bets.” In
2002, MBIA was leveraged 139 to one: it had $764 billion in outstanding
guarantees and a mere $5.5 billion in equity.18 So how did it get its
triple-A rating? The rating agencies said they based their assessments
on past performance; and during the boom years, there actually were
very few claims. That was before the housing bubble burst. Today,
MBIA is being called the Enron of the insurance business.
The downgrade of Ambac in January 2008 was merely from AAA
to AA, not something that would seem to be of market-rocking
significance. But a loss of Ambac™s AAA rating signaled a simultaneous
down-grade in the bonds it insured -- bonds from over 100,000
municipalities and institutions, totaling more than $500 billion.19 Since
many institutional investors have a fiduciary duty to invest in only the
“safest” triple-A bonds, downgraded bonds are dumped on the market,
jeopardizing the banks that are still holding billions of dollars worth
of these bonds. The institutional investors that had formerly bought
mortgage-backed bonds stopped buying them in 2007, when the
housing market slumped; but the big investment houses that were
selling them, including Citigroup and Merrill Lynch, had billions™ worth
left on their books. If MBIA, an even larger insurer than Ambac, were
to lose its triple-A rating, severe losses could result to the banks.20
What to do? The men behind the curtain came up with another
bailout scheme: they would create the appearance of safety by propping
the insurers up with a pool of money collected from the banks. The
plan was for eight Wall Street banks to provide $15 billion to the
insurers, something the banks would supposedly be willing to do to
preserve the ratings on their own securities. The insured would be

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underwriting their insurers! The image evoked was of two drowning
men trying to save each other. Even if it worked in the short term, it
would only buy time. The default iceberg was only beginning to emerge.
According to an article in the U.K. Times Online, saving the insurers
could actually cost $200 billion.21 It was an ante that could bankrupt
the banks even if they were to agree to it, which was unlikely --
particularly when at least one of the banking giants, Goldman Sachs,
actually had an interest in seeing the insurers go down. While on one
side of its Chinese wall, Goldman was devising and selling mortgage-
backed securities, on the other side it was selling the same market
short. Goldman was credited with unusual prescience in this play,
but the other banks possessed the same information. Goldman was
distinguished only in having the temerity to bet against its own faulty
derivative products.22 With the repeal of Glass-Steagall, creditor banks
can bet against debtors using short sales, putting them in a position to
profit more if the debtors go down than by trying to save them. Rather
than becoming a partner, the parasite has become a predator. The
parasite no longer has to keep its host alive but can actually profit
from its demise.

Bracing for a Storm of Litigation

Congress and the Fed may have unleashed an era of greed, but
the courts are still there to referee. Among other daunting challenges
facing the banks today is that when the curtain is lifted on their
derivative schemes, the defrauded investors will turn around and sue.
The hot potato of liability the banks thought they had pitched to the
investors will be tossed back to the banks. In an article in The San
Francisco Chronicle in December 2007, attorney Sean Olender
suggested that this was the real reason for the subprime bailout
schemes being proposed by the U.S. Treasury Department -- not to
keep strapped borrowers in their homes but to stave off a spate of
lawsuits against the banks. One proposal was the creation of a new
“superfund” that would buy risky mortgage bonds, concealing how
little those bonds were actually worth. When that plan was
abandoned, Treasury Secretary Henry Paulson proposed an interest
rate freeze on a limited number of subprime loans. Olender wrote:
The sole goal of the freeze is to prevent owners of mortgage-
backed securities, many of them foreigners, from suing U.S. banks
and forcing them to buy back worthless mortgage securities at

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face value “ right now almost 10 times their market worth. The
ticking time bomb in the U.S. banking system is not resetting
subprime mortgage rates. The real problem is the contractual ability
of investors in mortgage bonds to require banks to buy back the loans
at face value if there was fraud in the origination process.
. . . The catastrophic consequences of bond investors forcing
originators to buy back loans at face value are beyond the current
media discussion. The loans at issue dwarf the capital available at
the largest U.S. banks combined, and investor lawsuits would raise
stunning liability sufficient to cause even the largest U.S. banks to
fail, resulting in massive taxpayer-funded bailouts of Fannie and
Freddie, and even FDIC . . . .
What would be prudent and logical is for the banks that
sold this toxic waste to buy it back and for a lot of people to go to
prison. If they knew about the fraud, they should have to buy the
bonds back.23
The thought could send a chill through even the most powerful of
investment bankers, including Henry Paulson himself. Olender notes
that Paulson headed Goldman Sachs during the heyday of toxic
subprime paper-writing from 2004 to 2006. Mortgage fraud was not
limited to representations made to or by borrowers or in loan
documents. It was in the design of the banks™ “financial products”
themselves. One design flaw was that the credit default swaps used
to insure against loan default contained no guaranty that the
counterparties had the money to pay up. Another flaw was discussed
in Chapter 31: securitized mortgage debt was made so complex that it
was nearly impossible to know who owned the underlying properties
in a typical mortgage pool; and without a legal owner, there was no
one with standing to foreclose on the collateral. That was the
procedural problem prompting Federal District Judge Christopher
Boyko to rule in October 2007 that Deutsche Bank did not have standing
to foreclose on 14 mortgage loans held in trust for a pool of mortgage-
backed securities holders. The pool lacked standing because it was
nowhere named in the recorded documents conveying title.24 If large
numbers of defaulting homeowners were to contest their foreclosures
on the ground that the plaintiffs lacked standing to sue, trillions of
dollars in mortgage-backed securities could be at risk. Irate securities
holders might then respond with litigation that could well threaten
the existence of the banking Goliaths; and a behind-the-scenes bailout
would be hard to engineer in those circumstances, since investor
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lawsuits are not easily hidden behind closed doors.

“We™re Not Going to Take It Anymore!”
City Officials File Suit Against the Banks

The banks are facing legal battles on another front: disgruntled
local officials have started taking them to court. A harbinger of things
to come was a first-of-its-kind lawsuit filed in January 2008 by
Cleveland Mayor Frank Jackson against 21 major investment banks,
for enabling the subprime lending and foreclosure crisis in his city.
City officials said they hoped to recover hundreds of millions of dollars
in damages from the banks, including lost taxes from devalued
property and money spent demolishing and boarding up thousands
of abandoned houses. The defendants included banking giants
Deutsche Bank, Goldman Sachs, Merrill Lynch, Wells Fargo, Bank of
America and Citigroup. They were charged with creating a “public
nuisance” by irresponsibly buying and selling high-interest home loans,
causing widespread defaults that depleted the city™s tax base and left
neighborhoods in ruins.
“To me, this is no different than organized crime or drugs,” Jackson
told the Cleveland newspaper The Plain Dealer. “It has the same
effect as drug activity in neighborhoods. It™s a form of organized crime
that happens to be legal in many respects.” He added in a videotaped
interview, “This lawsuit said, ˜You™re not going to do this to us anymore.™”
The Plain Dealer also interviewed Ohio Attorney General Marc
Dann, who was considering a state lawsuit against some of the same
investment banks. “There™s clearly been a wrong done,” he said, “and
the source is Wall Street. I™m glad to have some company on my
hunt.”
The Cleveland lawsuit followed another the same week, in which
the city of Baltimore sued Wells Fargo Bank for damages from the
subprime debacle. The Baltimore suit alleged that Wells Fargo had
intentionally discriminated in selling high-interest mortgages more
frequently to blacks than to whites, in violation of federal law. But the
innovative Cleveland suit took much wider aim, targeting the
investment banks that fed off the mortgage market by buying subprime
mortgages from lenders and then “securitizing” them and selling them
to investors.25
On February 1, 2008, the State of Massachusetts filed another sort
of lawsuit against a major investment bank. The complaint was for
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Postscript

fraud and misrepresentation concerning about $14 million worth of
subprime securities sold to the city of Springfield by Merrill Lynch.
The complaint focused on the sale of “certain esoteric financial
instruments known as collateralized debt obligations (CDOs) . . . which
were unsuitable for the city and which, within months after the sale,
became illiquid and lost almost all of their market value.”26 The suit set
another bold precedent that bodes ill for the banks.
The dark cloud hanging over Wall Street, however, has a silver
lining for debtors and taxpayers. If Massachusetts prevails in its suit,
tax burdens will be relieved; and if Cleveland prevails in its suit, the
city could retrieve 10,000 abandoned homes that are now health
hazards to their communities and sell them or rent them as low income
housing. Following the precedent established by Judge Boyko in Ohio,
home buyers served with foreclosure actions can demand to see proof
of recorded title before packing their bags. And these legal successes,

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