09 June 2013



17 April 2012

The official story of the GFC

It has passed into accepted wisdom that the GFC was an unforeseeable sequence of events brought on by a failure in the US housing markets leading to a global collapse in equity and financial markets and with subsequent downturns in domestic economies.

It has been argued by mainstream media (and never seriously questioned) that any criminal behaviour that did occur was at the margins, and the necessary and prudent responses to the GFC failures should involve further deregulation of financial and labour markets, cutbacks in national government domestic spending programs and sell offs of national assets.

Following the bailouts of the financial markets from 2008 onwards running into trillions of dollars we have been lead to believe that (a) the worst is behind us, and (b) adequate risk controls have been put in place to ensure a return to stable economic growth.

All of these claims are false.

The truth on the GFC

There is overwhelming evidence from credible sources that:

·         The GFC, as triggered by a collapse in the US housing market, was foreseeable and US regulators ignored the warnings.

·         The GFC involved systemic, wall to wall instances of criminal behaviour in the financial markets with almost all of the culprits getting off free.

·         Attempts to address regulatory failures within the US financial markets subsequent to the GFC have been essentially window dressing and new financially dangerous practices have been allowed which promise further market breakdowns even more catastrophic than what we have seen to date.

·         Domestic populations globally have been ‘sold out’ to pay for the crimes of a financial elite.

·         Global financial markets are more unstable than ever.

Background to the GFC

Very briefly, From the 1970s till now key economic changes have taken place in the US and globally:

·         Financial markets have grown from 8% of the US economy to over 25%
·         Manufacturing has seen a matching decline with the advent of container shipping, the internet and the off-shoring of labour.
·         US wages have not kept pace with productivity gains. Profits have been transferred to an elite.
·         Instead, employees were encouraged to participate in the share and property markets as the keys to their prosperity.
·         These markets were boosted by low interest rates from the US Federal Reserve, encouraging property and markets speculation.
·         The result was a series of boom and bust episodes in shares  such as the Savings and Loans Crisis under Reagan, and the DotCom bubble later. The GFC is just the latest and most devastating.
·         Privatisation of government assets, notably energy utilities, took place globally with further scams arising (eg the California Energy Crisis manufactured by Texas based energy companies)
·         From the 1980s through till the present there were persistent pressures on Congress -- and globally -- to deregulate business, notably in the financial markets.
·         The chief legislative change that gave rise to the GFC was the repeal in the US of the Glass Steagall Act in the late 1990s which had maintained a division between ordinary banking services and more risky investment banking, a law put in place to stop any repeat of the dangerous practices that caused the 1929 Depression.
·         This legislative change was not surprising given that big business and major finance companies had contributed so much to the electoral coffers of legislators that they effectively owned them (a practice that continues to this day).
·         Following the repeal of the Glass Steagall Act (passed by Clinton under protest in the face of a Republican veto-proof majority in Congress) major US banks moved into the shady lending and securitisation practices that gave us the GFC,
·         Over the last twenty years there has also been an explosion of complex derivatives (geared) financial products, often backed by no assets at all, reportedly today valued at $600 trillion in a real world global economy of only $80 trillion annually. Clearly, financial markets have become something of a casino.
·         George Bush came to the US Presidency in 2000 by a stolen election, a fact that would not have been lost on financial insiders who were aware that the new President would be ‘business friendly’ and keen on deregulation. They would also be aware that Bush’s own brother, Neil Bush, was a major participant in a $1billion scam run during the Savings and Loans Crisis. The signal was in that regulatory controls were ‘off’ for markets of all kinds.
·         The Bush administration’s top 20 cabinet and executive posts were filled by Texas oil company executives. This was pro-business on steroids with an open contempt for government oversight.

It was in this historical context that financial markets, notably half a dozen leading US banks, took it upon themselves to ramp up property and share markets by straightforwardly illegal practices under well established law, charge exorbitant fees, and gamble that in any subsequent fallout they could con the US government, and taxpayer, into picking up the bill. They were right, and they did it.

The GFC, as triggered by a collapse in the US housing market, was foreseeable and US regulators ignored the warnings

  • In 2003, 50 US state Governors, Republican and Democrat, collectively sought to legislate against predatory bank lending practices -- of the type that subsequently gave rise to the collapse of the US housing market and the GFC. They were blocked by the US Treasury Department’s Office of the Comptroller of the Currency acting on Bush's advice using an arcane law from after the Civil War with the result that banks were able to engage in wholesale predatory mortgage lending practices right up to the GFC.

  • Early in 2008 Bush's Office of Management and Budget (OMB) refused to create a US Task Force to investigate mortgage fraud. The FBI had been unable to investigate serious cases of fraud, often involving millions of dollars, simply because of staff cuts made to meet the burgeoning security and terrorism industry. Since 2004 FBI officials had warned Bush that mortgage fraud -- of the type that lead directly to the sub prime mortgage meltdown --posed a looming threat and repeatedly asked the Bush administration for more money but were refused. Billions were wasted on corrupt, no-bid Iraqi contracts for the likes of Haliburton but nothing to stem mortgage fraud and corporate scams.

  • Citibank was one of the largest US mortgage lenders. Richard M. Bowen, former chief underwriter for Citigroup’s consumer-lending group gave evidence before a Congressional Inquiry following the GFC. He said he warned his superiors that the mortgage loans the companies were selling to customers and then "securitizing" (ie pooling to place on the investment market) were, essentially, fraudulent.

"In mid-2006, I discovered that over 60 percent of these mortgages purchased and sold were defective [ie the applicants did not meet creditworthy standards and the bank had every reason to believe they would default at some stage] " Bowen testified on April 7 before the Financial Crisis Inquiry Commission created by Congress. "Defective mortgages increased during 2007 to over 80 percent of production."

Citibank knew home borrowers were unlikely to pay after two years of low teaser rates that morphed into killer rates yet they lent the money anyway – knowing they, or subsequent owners of the mortgage, would foreclose and get the house and the share market investors would lose their shirts.

They promoted and accepted these loans because there was so much profit to be made in moving the risk off their books and onto the pooled investment fund recipients.

It was the same Citibank that in 2010 sought to bail out Greece with loans and then went out and bet the derivatives market that those loans would fail. That's inherently fraudulent behaviour.

The US regulatory framework had been dismantled in favour of corporate interests

  • In Oct 2008 Mr Lynn Turner, former chief accountant of the SEC, gave evidence to the US House Oversight Committee investigating the collapse of insurance giant AIG. He testified that the SEC Office of Risk Management, which had oversight responsibility of all US securities, including swaps, had been progressively cut by the Bush administration from 146 personnel. By Feb 2008 only one person was left for assessing corporate financial risk management for the entire US securities market.
  • In Oct 2008 the New York Times reported on Justice Department data showing "prosecutions of frauds against financial institutions dropped 48 percent from 2000 to 2007, insurance fraud cases plummeted 75 percent, and securities fraud cases dropped 17 percent." -- all on the Bush watch.

  • In 2007 Wall Street firms went before the US Supreme Court (Credit Suisse First Boston Ltd v Billings) and argued that the SEC, which has no criminal powers, should have the sole authority to regulate them and that they should be immune from other US laws governing collusion and commercial bribery. The Supreme Court agreed with them. Bush did nothing to protect consumers from the effects of this outrageous legal decision.

  • Since 2005 the US Justice Dept has refused to prosecute over 100 corporate criminal cases preferring instead to enter into "deferred prosecution agreements" which allows the government to collect fines and appoint outside monitors to impose internal company reforms while freeing the companies themselves from admitting to what are, in most instances, serious corporate fraud.

  • The US administration passed a bankruptcy bill in 2005 that forced impoverished workers into debt slavery. No longer would it be possible for individuals to start afresh like corporations; personal debts would be a lifetime millstone forever growing due to usurious interest rates and corporate greed.

  • Over a ten-year period, the richest 1% of Americans received Bush tax cuts totalling almost half a trillion dollars. Each person in this elite group averaged $342,000 over the decade. In the face of known budgetary constraints (including wars in Afghanistan and Iraq) these tax cuts – which contributed nothing to any national economic growth despite the lie of “trickle down” Reagonomics – were made to a favoured, wealthy elite, as Bush put it: “These are my [electoral] base.”

  • The US government effectively made corporate taxes optional by allowing the off shoring of corporate profits. A 2008 study by the US government Accountability Office found that 72% of all foreign corporations and about 57% of U.S. companies doing business in the US paid no federal income taxes for at least one year between 1998 and 2005. More than half of foreign companies and about 42% of US companies paid no US income taxes for two or more years in that period.

  • It was Bush who in 2006 appointed Henry Paulsen as Treasury Secretary when he knew the financial markets were in trouble, and he knew what he was getting. In 2000 Paulsen had pressed the SEC and Congress to remove leverage limits that bound investment banks (including his own company, Goldman Sachs). He was knocked back but in 2004 he tried again and succeeded. Every one of the firms that were ultimately bailed out by the US taxpayer -- Lehman, Bear, Fannie, Freddie and AIG - all had leverage more than double that of the previous limits when they blew up thanks to him. And it's the same with Federal Reserve Chairman, Ben Bernanke, appointed by Bush in Feb 2006. He handed out hundreds of billions in emergency lending based on credit ratings from companies that gave AAA grades to toxic securities. Bernanke and Paulsen are front men for the largest criminal rip off in history, overseen from start to finish by Pres.George Bush Jr. and endorsed by Pres.Obama.

The GFC involved systemic, wall to wall instances of criminal behaviour

·         This is the view of many credible economic commentators.

·         William Black was the chief US prosecutor for criminal charges arising out of the Reagan era Savings and Loans crisis in which he prosecuted hundreds of corrupt finance officials.

Black claimed that the GFC was a hundred times worse than the S&L crisis and few have been prosecuted. Moreover, he identified the behaviour of leading US banks involved as “control fraud”, a system whereby corporate officers knowingly run the company into the ground in order to obtain exorbitant executive bonuses or to engage in profitable trades based on insider knowledge. In the case of the biggest US banks they relied on the “too big to fail” argument, that the US government, and taxpayer, would bail them out in the event of market collapse – which is exactly what happened.

Control Fraud:

         Extreme growth by making (or purchasing)
         Loans of extremely poor quality at a premium yield
         While employing extreme leverage, and
         Providing grossly inadequate allowances for loan and lease losses


·         As previously mentioned, Citibank’s Richard Bowen gave evidence before Congress that Citibank was issuing home loans they knew would fail and on-sold these loans to unsuspecting investors. Nearly all of their home loans issued by them were known to be defective.


A handful of leading US banks that dominated the home loan market set up a system called MERS in the early 2000’s.

They initially created a market by pooling and on-selling mortgages to institutional investors like pension and hedge funds in a process called "securitization". This appeared to get financial risk off their books but they used several sleights of hand in the process.

They paid ratings agencies to rate these funds as AAA when they knew they contained sub-prime mortgages, ones almost guaranteed to fail.

They assigned the transfer of mortgages to a private company set up by them -- MERS (Mortgage Electronic Registration Systems). This way, the regular trading of the underlying mortgages in these pooled securities could be tracked electronically.

Unfortunately, in every state in the US property transfers need to be recorded at the state level and various stamp duties paid in order for those transfers to be legal. MERS failed to do this, by design.

In particular, Mers failed to properly register properties at the state level in their initial securitization process, failing to legally transfer those properties to the pooled funds. Consequently, those massive funds were in many instances never trading anything more than worthless paper! They discovered the problem when they tried to foreclose on failed mortgages and found they didn't legally own the homes. Those pooled funds then set about fraudulently recreating missing documents and presenting them to the courts.

It gets worse. MERS, and many of the big banks, not only failed to properly transfer ownership title, they often destroyed the mortgage paperwork and loan agreements! They did so because they wanted to believed they could do so (in defiance of state laws) and, more importantly, because any examination of the original loan applications would show that the big banks were selling worthless loans to the pooled investors. The big banks were even "shorting" these pooled offerings, selling them to the public while betting they would fail through the derivatives market.

The entire system of property registration in the US is in disarray. Legal title of ownership is uncertain. The pooled funds are coming after the originating banks (one claim is for $47 billion), as are thousands of homeowners who have been wrongfully evicted from their homes and defrauded of ownership.

How much money is at stake here in this legal mess: on some estimates, $1.5 trillion. That is seriously systemic criminal behaviour.

Update: On Feb 12 2012 Pres. Obama signed off on a deal brokered between all 50 US states, the Federal Government, and the 5 leading US banks largely responsible for the mortgages fiasco.

The companies will be released from any legal liability in relation to their rorting of the US mortgage market. In return they will pay $25 billion into a trust fund to assist those harmed by their criminal behaviour. Over 4 million families lost their homes to foreclosure yet just 750,000 of them will receive a one-time check for just $1,800 to $2,000, which for many will barely cover the cost of moving to new homes.

The big US banks stole like bandits and got away free.

·         Simon Johnson, a former chief economist of the International Monetary Fund, characterizes the process we have been through in the last two years as a "quiet coup," and notes that all the ensuing financial "reforms" have been designed to serve the interests of a financial elite and not the public. He claims there is little difference between the current collapse and previous ones in Indonesia, South Korea and Russia where financial elites have captured government and used it to their own advantage. The public has been forced to extend the protections of the conservative banking system to shysters and gambling sharks. This is the same process that has been occurring in Europe with the bailout of bankers there.

·         The final stage of this global scam by financial markets is to utilise government bailouts to buy up national assets at fire sale prices. This what is happening in Greece with European bankers insisting on asset sales. It is what is happening in the US with chosen banks being invited by the US government to receive low interest (or no interest) loans to buy up tranches of distressed properties from Freddie Mac and Fannie May at cheap prices, the very same properties those banks offload to those agencies at full price following the GFC!

New financially
dangerous practices have been allowed which promise further market breakdowns even more catastrophic than what we have seen to date.

There are many instances but I provide here some particularly significant items from the US economy:

·         New US accounting rules endorse corporate fraud. Following the GFC US share markets tracked down until 10 March 2009 when they mysteriously zoomed up. Why? Because on that day the US Federal Accounting Standards Board (FASB) succumbed to financial markets pressure and installed new accounting standards: big banks would be allowed to value trillions of dollars of bad loan book debts not at current market values but at notional values. A mortgage would be kept on the books as an asset at a value of $300,000 when it had no chance of selling then, or now following the GFC, at anything over $180,000. FASB had got the message from a Congress owned by the finance markets: either allow financial firms to lie about the market prices of their alleged assets or Congress would legislate into effect that which FASB refused. Subsequently, listed US companies have gone into receivership showing only 50% of their asset worth stated only days previously. 

·         Computer generated trades in equity markets have occurred post-GFC and are evidence of serious fraud. On May 6 2010 the Dow dropped 1000 points in computer driven trading. Nothing has been changed to protect the public.


·         High frequency computer trading scams are run regularly on US markets. US brokers use high frequency trading to intentionally probe the market with tiny orders that are immediately cancelled in a scheme to gain an illegal view into the other side's willingness to pay.


·         Off balance sheet accounting is still permitted in the US and continues to threaten market stability. Wells Fargo has $10 billion of risk-weighted assets. It has in $2 trillion of off-balance sheet assets.

·         The OTC (over the counter) derivatives market still remains almost entirely unregulated, with no end-of-day reconciliations. It dwarfs the regulated securities markets.

·         Further legislative approval for wholesale corporate fraud. The Jumpstart Our Business Startups Act or JOBS Act, is a law intended to encourage funding of US small businesses by easing various securities regulations. It passed with bipartisan support, and was signed into law by Pres.Obama on April 5, 2012. The bill eliminates SEC reporting requirements for enterprises with annual revenues up to $1 billion. It is a virtual blueprint for financial scams. Consumers will need to do their own due diligence on companies they intend to invest in.


·         Improper use of savings bank status threatens the US government ability to bail out ordinary depositors in the event of a crisis.  The Federal Deposit Insurance Corporation (FDIC) guarantees these funds but has limited assets and would have to rely on the US government sale of Treasury notes to handle any large collapse of US banks. In Oct 2011 Bank of America Corporation, hit by a credit downgrade,  moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation. The exact figures are unknown but are believed to be in the trillions. BAC has $75 trillion worth of derivatives trades. Any calls upon the FDIC to bail out derivatives trades of trillions of dollars would be simply unsustainable. If this merging of derivatives trades with ordinary bank cash deposits were to be non-transparent or repeated by other banks then the entire viability of the US banking system would be called into question in any future crisis.


·         The US middle class is being wiped out and the statistics prove it.


·         US debt levels are unsustainable. On a per capita basis they are higher than that of Greece. A collapse of markets is more likely than not.

Domestic populations globally have been ‘sold out’ to pay for the crimes of a financial elite

One only has to look at the bailouts in Iceland, Ireland and Greece to see this. Neither the governments nor the people are being bailed out in these instances; instead, the IMF, World Bank, European Central Bank and the finance markets are bailing out greedy bankers who made bad loans, imposing draconian measures on national economies that will gut real economic activity for decades – and all because those banks made loans without undertaking due diligence on the ability of the borrowers to repay, or knowingly mislead them.

The matter is compounded by the fact that those banks have leveraged their lendings through the derivatives markets, a casino of ‘funny money’ that mostly has no asset backing. Those gearing arrangements (sometimes as much as 100:1) have left major US and European banks especially vulnerable to non-repayment by individuals or national governments.

Global financial markets are more unstable than ever

See the instances I referred to previously concerning dangerous new regulatory practices in the US financial markets. Read any of these commentators for more details:

Karl Denninger
Mike Whitney
Paul Craig Roberts
Matt Taibbi
Pam Martens
Nouriel Roubini
Janet Tavakoli
Henry Liu
William Black

Implications for HR professionals

HR professionals are not expected to know everything, but they must move beyond superficial political and social analysis if they expect to conduct reasonable contingency planning, especially in larger organisations with longer project lead times.

How many HRM managers know, for instance, that Mitt Romney’s three key foreign policy advisors are board members of the same Right wing think tank (Foreign Policy Initiative) which, following a baseless Iranian terrorist scare in Nov 2011, called for immediate US military attacks upon Iran?

The consequences of such an action would likely be a massive oil price hike (think fuel at $3.00/litre) with major cutbacks in the transport industry and foodstuff price hikes.

This is certainly something for the HR professional to ponder upon.
There at least has to be an awareness beyond the news headlines.

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