Arrest of IMF Managing Director Dominique Strauss-Kahn in New-York has crumbled euro and put the financial aid programs for European countries that fetched themselves in a severe economic situation at risk. It is unknown, whether 62-year-old politician and financier is actually guilty of the things he’s accused of, but the financial consequences of his arrest are on hand. Assuming that Strauss-Kahn, known for his playboy adventures, actually did what he was charged with, that might the most costly liaison in the world. So what kind of global financial order is it, if it can be ruined by a sudden testosterone attack of an aging Frenchman?
Economic crisis of 2008 — which consequences the world still copes with — has made numerous economists and politicians think about building a new world economic model. Doubts that currently dominating economic model can be a solid foundation of economic prosperity have appeared. World of the virtualized financially-economic phantasmagoria is unsteady, fragile and subjected to various risks that cannot be forecasted, let alone prevented. Views of unavoidability of new system start to spread among economists — it will resemble socialism, perhaps, yet not in its classic, 19th century form.
American ninja
I believe that everyone remembers that the mortgage loan crisis was proclaimed the reason of American crisis of 2008. American bankers have a professional slang word NINJA. This abbreviation is decrypted as “No Income, No Job, No Assets”, i.e. describing the quintessence of a “bad” mortgage recipient. According to official version, it were millions of American ninjas who caused the world crisis, having failed to meet their mortgage obligations.
So how could it possibly happen that banks gave such a great number of mortgages without any backing, that it eventually ruined American financial system first and then the global one? There were plenty of people, willing to answer that irritating question. Even a theory that explained the hidden political reason emerged in the USA. Senator Christopher Dodd from Connecticut named that reason out loud — CRA (Community Reinvestment Act). That was a name of law, adopted in 1997 during Clinton’s rule and aimed to protect the poorest strata of American society from the banking discrimination. The fact the mortgages, issued to “ninjas” could have provoked the banking crisis, which outgrew into the global financial one, is uncountable. Yet it’s just a half of truth. The second half is the motivation of the bankers. Have they really carried out the aforementioned CRA with such zeal that, worrying about American poor, they’ve accidentally ruined the mighty banking system of the greatest world economy? It may hardly be so.
America is a country of comic series
More than a half year before crisis, in February of 2008, PowerPoint presentation was very popular at Wall Street. Banking clerks were having fun, watching the comic pictures, describing the reasons and consequences of the crisis, that hasn’t started yet. Global economic literature has no better explanation of the phenomenon that shattered an entire world. Here’s a brief summary of it.
Scene 1. Office of a mortgage lending consultant “We make your dreams come true”.
Customer: Damn, I’d like to buy a house but I don’t even have the money for the cash down and I’m afraid that I can hardly afford the monthly payments either. Can you help me?
Consultant: For sure! Cash down payment isn’t necessary anymore, as long as the value of the house will only be increasing from now on. As for the monthly payments, we’d make them extremely low just for you. We’d increase them later, OK?
Customer: Splendid, but I have one more question. My employer is a mean guy and he might refuse to give me an income certificate. Will that be a problem?
Consultant: I beg you! We can give you a special mortgage loan called “Foe liars”. You only have to confirm your incomes and place of work yourself.
Customer: Wow, isn't that great of you? You don’t push out even to the likes of me.
Consultant: Frankly speaking, it’s not us, who give the mortgage. You’re to get your money in the bank, so we don’t care whether you’re going to give us our money back. We’ll get our commission charges anyway.
Client: What a go! Well, let’s do it then!
Several weeks later in a bank. The first bank — Bankland SA. “Open your Xmas account today”.
Banker: We have to get rid of those shitty mortgages somehow. They start to stink. Thank God, now we can dump to those tricksters from New-York, they have the financial stunts of their own. I’m going to call them right away.
Investment bank at Wall Street. “Trust your investments to the Greatest Tricksters”.
Wall-Street banker: Jeez, we have to dump the shitty mortgage loans until they haven’t attracted every fly in the neighborhood.
Employee: Boss, but is going to buy the crap?
Wall-Street banker: Let me think a bit! At first issue new obligations and use these crappy loans as a backing. Then we sell the obligations to investors and promise to pay dividends, while the mortgage loans would be repaid.
Employee: I don’t get it. Shit will remain shit anyway.
Wall-Street banker: Of course, it will. By itself all of those loans would remain shitty. Bu we’d group them along with the good, reliable loans. Every stack will have only a part of irrevocable loans. And as long as the real estate prices only go up, we have nothing to worry about.
Employee: I’m still behind you.
Wall-Street banker: New obligations will consist of three parts. Let’s call them “good”, “not so good” and “bad”. If part of loans is not repaid — which will happen for sure — we’d promise that investors of “good” loans will get their money first of all, investors of “not so good” ones — in the second turn, and investors of the “bad” ones — last of all.
Employee: I’m catching up with you. As long as investors of the “good” loans risk less, they are to get the lowest interests, then we’d pay more for the “not so good ones” and for the “bad” ones they are to get highest interests.
Wall-Street banker: Exactly. But it’s not the end. We insure the obligations of “good” loans and the rating agencies will give us the highest ratings of trust from AAA to A. Then we’ll get BBB to B ratings for the “not so good” ones and no one will ever ask about ratings for the “bad” one anyway.
Employee: So you’ve created the AAA and BBB stocks out of bunch of some shitty high-risk mortgage loans. Boss, you’re genius. But are we going to sell them to?
Wall-Street banker: These dolts from the Security Exchange Commission won’t let us sell them to widows and orphans, so we’ll have to sell them to our institutionalized customers.
Employee: Whom exactly?
Wall-Street banker: To insurance companies, banks, Norwegian cities — to anyone, seeking for secure and reliable investments.
Employee: But if we use the crappy loans as the insurance for the new obligations, we’ll never get rid of them completely. Why do we have to show them in the balance sheet?
Wall-Street banker: That’s why we won’t. Guys, who run our accounting, will allow us to incorporate a phony company at the Cayman Islands, which we are to sell all the loans.
Employee: Fantastic! But will they allow us to do it? We’re just dragging the same ole crap from one place to another, while it remains ours.
Wall-Street banker: You’re right. But we’ve convinced them that in order for American financial system to remain healthy, investors have to remain ignorant regarding the complicated transactions we silently carry out.
Meanwhile, in the accounting department. Office of the Accountant’s King “Picking on everyone”
Visitor: Dear sir, as an investor and a citizen, I demand you to make all the financial institutions be absolutely transparent and undisguised in their financial reports.
Accountant’s King: F*ck you…
Who could’ve known that it will come to that point. Scene at the New-York Investment Bank.
Norwegian customer: Hey, what’s going on? We’re not getting our annual dividends.
Wall-Street banker: Well, yeah, I was right about to call you. It seems that a couple of jerks are not paying for the mortgage loans that secure your obligations.
Norwegian customer: Wait a minute, but we’ve bought “good” AAA-rated obligations. The most secured ones. We’re the first to get paid.
Wall-Street banker: Mortgage loans turned out to be even shittier than we assumed. I assure you that we’re disappointed as well.
Norwegian customer: But you’ve assured us that real estate prices will only increase and that your loan-recipients will always be able to refinance their mortgages.
Wall-Street banker: That was an erroneous assumption. We’ve f*cked that up. I’m sorry.
Norwegian customer: Stick your assumptions up your ass. But you’ve got AAA ratings after all!
Wall-Street banker: They’ve f*cked that up, too.
Norwegian customer: But the obligations were insured. What to the insurance companies say?
Wall-Street banker: Are you kidding me? They don’t have enough money to make up the damage. They’ve also f*cked that up.
Norwegian customer: For f*ck’s sake. What am I going to tell people in Norway?
Wall-Street banker: Say that you’ve f*cked that up as well.
Norwegian customer: To hell with you!
Wall-Street banker: As much to you, sir.
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