Invasion of the Moneylenders – Part 5 – “A Pound of Hamburger”

By Peter Ewart

This is the fifth in a series of articles on the banking and credit industry.  The other articles were:  “Invasion of the Moneylenders – Part 1”, “Invasion of the Moneylenders – Part 2”, Invasion of the Moneylenders – Part 3” and “Invasion of the Moneylenders – Part 4”.)

In Part 3 of this series of articles, we discussed how financial institutions in the U.S. used deception, trickery and, in some cases, fraud to sell “subprime mortgages” to low income people throughout the country.  But there is much more to this scandal than just that.

Yes, on the one hand, financial institutions scammed lower income people with these “subprime,” or as others call them, “subcrime” loans .  On the other hand though, evidence is emerging that these institutions swindled many more, including middle and higher income people, as well as their own colleagues in the economic elite, both at home and abroad. 

How did they do this?  Perhaps an analogy would help here.  In Shakespeare’s famous play, “The Merchant of Venice,” Shylock, the moneylender, insists on getting “a pound of flesh” from a debtor who has defaulted on a loan.  Over the years, the term “a pound of flesh” has come to symbolize the extreme greed of those who will stop at nothing to get back a return on their loan or investment. 

However, in describing how finance capital of today has behaved, perhaps a “pound of hamburger” is a more appropriate term than “pound of flesh,” partly because “hamburger” is such a uniquely American food, and partly because the method of making hamburger is most appropriate to explain how the scam worked.

When manufacturing hamburger, meat processing companies take pieces of slaughtered cattle, and slice, chop and grind them up in various machines.  But what some unscrupulous companies have been known to do is throw pieces of diseased or tainted meat in with the good meat, and mix it all together.  They douse the tainted meat with  food colouring, and voila!, a package of bright red “fresh” hamburger is ready to be displayed on some gleaming white supermarket counter. 

People buy this hamburger all over the country, and, oblivious to its origin, cook it up on their barbeques.  A lot of the time, no one is the wiser.  Hey, someone gets an upset stomach?  Who knows?  Isn’t there always some kind of flu bug going around?  And, after all, it could have been the mayo.

But once in a while, as Eric Schlosser describes in nauseating detail in his excellent book “Fast Food Nation,” someone gets really sick from the hamburger and even dies (1).  That’s when someone somewhere blurts out: “Let’s take a closer look at the meat.”

And this is exactly what has happened with the subprime mortgage scandal.  Unscrupulous brokers, working closely with the big financial institutions, used hook and crook to sign up a lot of poor people for shaky, overpriced mortgages that they never could pay off.  Then the financiers took these tainted mortgages, sliced, diced and chopped them up, mixed them in with dollops of “higher quality” debt, and put the whole shebang into “packages” of “high value” financial securities. 

To market these toxic “packages,” the financiers (as the British comedy team John Bird and John Fortune have so wickedly pointed out) were quite adept at thinking up “very good names” for them.  These names included (believe it nor not) “Select High Income Fund,” “Absolute Return Fund,” and “High Grade Structured Credit Enhanced Leverage Fund.”

With these impressively named products in hand, then the financiers went off to convince the credit rating institutions (which are bankrolled by these same financiers) to put a “Grade A” stamp on them.  Once that was done, they put the “packages” on the market, and sold them far and wide to other financial institutions, businesses, pension funds, foreign governments (like China and Japan), and so on.  Who could resist?  These “structured investment vehicles” (to use the jargon) promised a “high” return on investment, and, after all, they had the stamp of the Wall Street bond and credit rating agencies.  It was a no brainer.

So everything appeared to be copacetic.  Investors were munching away on these delicious hamburgers, and talking about how great the economy was doing.  That is, until a few began to feel a bit queasy in the stomach.  “Just what the heck is in these goddamn burgers,” they asked nervously, and then roused their accountants out of their slumber to take a look.  Peering into these “packages” of securities is, of course, not the easiest thing in the world to do.  Hedge funds, private equity companies, and other deregulated “creatures” of this modern age, are remarkably opaque and not required to reveal much about what they do.  Of course, that posed a problem, as these very companies had been intimately involved in processing and distributing the “hamburger.”

Nonetheless, just as hamburger “juice” always seems to seep out of the package no matter how well you wrap it, so information leaked out about the tainted “packages” of securities.  Pandemonium broke out on financial markets.  On one hand, brokers were clamoring to sell these dripping wet “packages.”  On the other hand, no one wanted to buy them for fear of becoming more “infected.”  As in musical chairs, those who were left standing with the biggest load of raw hamburger in their hands found themselves in deep trouble.

Then the big question became: “Who’s been eating these burgers?”  And the answer was not reassuring.  Many, many companies, institutions, pension funds and governments.  As a result, tens of millions, if not hundreds of millions, of people are going to be directly or indirectly “poisoned.” Millions of homeowners will also be hit because the price of their houses will plummet as more and more foreclosed homes are abandoned and put on the market.  In turn, construction and building supply companies will suffer, and so on.

That being said, it should be clarified that the scandal cannot simply be reduced to the banks doing a scam on everyone else, including other big corporations.  Yes, the banks and hedge funds were right in the middle of it all.  But the fact of the matter is that (as we will discuss in a later article) banking capital is inextricably bound up and merged with other sectors of big business.  Indeed, many big industrial and retail companies are themselves “moneylenders” and some are involved up to their eyeballs in this subprime scandal. 

How far will this crisis in the financial industry go?  Again, it is a bit like the meat processing business.  When one bad cow gets ground up with 1000 good ones, the whole batch is tainted.  And so it goes with the economy.  The infection will not be limited to the financial sector or the U.S. economy alone.  Indeed, this scandal is shaping up to be one of the biggest economic calamities of modern times, one that could act as a trigger to hurl the U.S. and the world economy into deep recession, or even depression.

Many people, especially those who have lost their houses, investments and pension funds, no doubt believe that the culprits responsible for creating such a disaster should be marched in front of a firing squad.  But that won’t happen.  Things in the realm of high finance tend to work the same way as in the meat processing industry.  Slaughter houses in the U.S. that allow tainted or diseased meat on the market, rarely get more than a slap on the wrist.  And the same is true with the financial sector. 

Some analysts argue that the investors, whether they were companies, pension funds, or individuals, were just plain stupid and should have known better.  “Let the buyer beware,” the old saying goes.  However, as one wag has pointed out:  “It doesn’t matter if a person is walking down the street dead drunk.  It’s still a crime to mug him.”

In any case, so far the “muggers” in the financial industry haven’t even got what might be called a slap on the wrist.  Instead, not a few of these CEOs are being rewarded with millions of dollars of payouts as they march off down the road into early retirement in Palm Springs or the Bahamas.  A good example - the CEO of the investment banking firm, Merrill Lynch & Co., which was heavily involved in the subprime market, was given a “golden handshake” of $161 million of stock options and retirement benefits (some reports say that he will get more) after taking the company to its biggest loss in its hundred year history (2).

But these CEOs are not the only ones who have done very well.  Some of the financiers who were selling this toxic debt to others as Triple AAA investment, were also, behind the scenes, “shorting” on these same securities, i.e., betting billions that the price would go down.  Now that the prices have, indeed, plummeted, investment companies like Goldman Sachs of New York stand to make truckloads of money (3).  The situation is comparable to someone knowingly selling tainted hamburgers, while behind the scenes making a bet with a bookie that a lot of people are going to get sick from eating them. 

But you have to give the moneylenders credit for audacity.  After pulling off one of the biggest swindles in world history that will have disastrous economic fallout for years to come, they are currently negotiating with government to bail them out with taxpayers’ money.  They have put on those ragged hobo clothes they keep in the closet for just such occasions, and will be going to Congress to sing that old Depression era song “Hey buddy can you spare me a dime?”  Except, of course, they don’t want a dime; they want billions.  Otherwise, they croon, “we will all suffer.”

But the U.S. and the entire world are hurtling into uncharted economic and political territory.  In the turbulent years ahead, the American people, as well as those in other countries, may just decide that enough is enough.  For once, the moneylenders might not get their “pound of flesh.” 

Next in series of articles: “The Invasion of the Moneylenders – Part 6 -  “Until Death Do You Part”

• 1.      Schlosser, Eric.  Fast Food Nation
• 2.      Stewart, Sinclair.  “O’Neal Waves Goodbye with $161 Million.”  Globe & Mail.  Oct. 31, 2007.
• 3.      Horowitz, Jed.  “Goldman Not for the Risk Averse.”  Globe & Mail, Nov. 1, 2007.

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