What The Hell Is Wrong With People?

I will probably draw comments like "you doth protest too much!" for this, but I think it's important.

My exchange in email with Jonathan Weil over my "Whistling Past The Graveyard We Be", in which he originally took umbrage over my "soft" characterization of him being late to call things what I believe they are (that is, fraudulent misconduct) rather quickly turned into my rehashing a piece of my Ticker on synthetics a couple of days ago, pointing out that this, plus the removal of leverage limits, plus generally bogus accounting and willful blindness are the primary reasons we're in this mess - and that none of this is a "mistake". 

His ultimate reply to me was that there was no point to arguing with a crazy person.

Well, if I'm crazy for my refusal to believe that any of this was an accident or mistake then I'll wear that badge with pride, because I cannot square any of what has happened thus far, nor the road to Hell we are presently on, with the generalized idea that any of this was an accident - or a mistake.

To the contrary - it is my considered opinion that nearly the entire last two decades of our so-called "Economic Progress" has been defined by parties all trying to screw one another in any form or fashion they could manage to pull off.

Back in the 1990s I saw a metric ton of this while running MCSNet.  We would get a literal dozen or more calls a day from people who wanted accounts to access the Internet - but they first asked our customer service representatives if we carried certain material that was flatly unlawful to possess or distribute, including groups linked to stolen computer software and child pornography.  We didn't, we said so, and they went somewhere else - usually after loosing a long string of obscenities at the employee who delivered the news.

Internet firms of all stripes were claiming Internet growth rates of 30% or more per quarter during the 1990s - in many cases right up until it all blew up.  It was a lie - that growth rate in the Internet was a couple of quarters in duration, corresponding with the release of Windows 95.  This is a fact that thousands of people knew because we, along with those others, had access to the Internet's "core" routing tables - we had to in order to do our job.  Yet this lie was repeated by company after company in conference call after conference call and drove much of the speculative Nasdaq Stock Bubble.  When it collapsed everyone who believed in that lie got creamed and millions of Americans lost (effectively) their entire investment account.

But let's return to the present mess, shall we?

It's not an accident when you create a security because some hedge fund manager (even if a really bright one) comes to you and wants to short something - so you give him a means to do so, and then sell the other side of that off to people without telling them how it came into existence in the first place, including how, why, and at who's behest and for what purpose you created it.

It's not an accident when you run up against leverage limits (as Goldman did) and your big cheese (Hank Paulson at the time) goes to the SEC and gets them to remove that leverage limit for investment banks - then the two investment banks that subsequently fail, Bear Stearns and Lehman, both do so after more than doubling their leverage beyond the former legal limit!

It's not an accident when a whole host of Wall Street (and Main Street!) banks willfully and intentionally ignore FBI warnings in 2004, a Corelogic credit survey in 2006 and HUD study in 2007, all of which warned of rampant mortgage fraud and lies about incomes in 50% or more of "ALT-A" loans, packaging up that debt and selling it to investors without warning them that the so-called "quality" claimed in those loans was almost certainly - in the opinion of both government agencies and private credit analysts - simply not present.

It's not an accident when the ratings agencies also ignore these warnings - if there was a group of companies that should have been the ultimate experts on such matters it is S&P, Moody's and Fitch, all of whom either had to know or should have known about the warnings by The FBI, Corelogic and HUD, never mind their (admitted) computer models that omitted any possibility of home price declines.

And it's not an accident when you have the Realtors(R) chief economist penning not one but two books claiming that the housing bubble would not bust (with an implied "ever"), even though two minutes with Excel (or a rudimentary understanding of grade-school mathematics - exponents, to be precise) will disclose that it is flatly impossible on a mathematical basis to grow debt faster than GDP on a permanent basis without a bust inevitably taking place.

Now not all of this is actionable - or criminal.  Indeed, I can write books pontificating on all sorts of fanciful things all day long, and unless I missed something being completely full of it (as many of the books on economics, business strategies and investing are!) there's not a thing wrong with doing so.  If someone's willing to pay $20 for a bunch of bound pages that contain nonsense, that's the buyer's problem in the general sense, not (usually) the author's or publisher's.  That's because I can offer my opinion all day long and as long as I'm not inducing someone to engage in some sort of action by which I will profit in some form or fashion, and am thus trying to get someone to commit (or not commit) an act as a consequence of my speech I have no obligation to be either intelligent in the presentation of my opinion - or even truthful.

This, incidentally, is part of why it's not unlawful (civilly or criminally) to lie as a politician - all he or she is after through their speech is your vote, and it's flatly illegal to buy or sell those (even though we know people do!)

But things are different when one purports to sell securities of various sorts, or for that matter when one intends to engage in commerce generally. 

We have laws about that, just as we have laws about various forms of financial statement and requirements that they be rendered honestly.

We all file statements every year that are supposed to represent the truth - they're called tax returns.  You can go to jail for lying on them, although few people do.

In the commercial world I can't sell someone a car that knowingly has a tampered-with odometer unless I disclose it.  There's a checkbox on the back of my title for that - "mileage not actual" - and if I don't check it, and I lie, I can be punished.

Under the general body of law I cannot intentionally screw someone in any form of commerce - that is, withhold information from someone on purpose or lie about what I know for the purpose of getting them to act in some fashion (like giving me money for some investment) when that which I either do know or should know and either lie about or intentionally omit would lead a reasonable person to not hand over their cash if they were informed.  If that act of intentional omission or lie leads the other person to be harmed I have committed an offense, and in many cases that offense is both a civil and criminal matter.

This sort of conduct, however, has become literally embedded in virtually all forms of our lifestyle, and I would allege that a big part of "why" is that it is almost never punished. 

How many stories about crooked used-car dealers have you heard?  Got a fax machine?  If you do you've probably gotten dozens if not hundreds of "pump sheets" for various over the counter stocks - all claiming "huge profits" to be had by buying X.  These are illegal in nearly all cases by the way in some form or fashion, but I gave up forwarding them to the SEC and FBI more than a decade ago - they don't care.  During "Cash for Clunkers" there were stories in the media (which I reported on) of dealers demanding "side letters" that would cause you to lose if they failed to properly file the paperwork and the rebate was denied - side letters that, incidentally, the government said were improper.  Was anyone led out in chains over that?  If so I didn't see it on TV.

How many "homeowners" lied about their incomes when they applied for a mortgage or refinanced?  Millions.  Many more had paperwork changed by unscrupulous brokers, and there were posts all over Internet Discussion Boards talking about how to "game" the various automated underwriting programs that were in use toward the end of the bubble.  The FBI even separates it out - "fraud for housing" (lying to get a house) which they considered unworthy of their time to prosecute, even though any lie on a mortgage - or other credit - application is a federal offense.

If we are to have an honest and productive economy this must stop in all of it's forms, and the apologists for this sort of behavior must be shown the door.

The Media's job in no small part is to report on these lies.  For each of these events of deception and screwing that takes place trust in our economy generally and our capital markets specifically is damaged.  It is one thing to place a bet in a casino knowing that the "rake" guarantees the casino will make money over time, but it is quite another to wonder whether the dice are loaded, the cards marked or the railbird behind you is secretly communicating your hole cards to the guy on the other side of the table.

When society and commerce degenerates into "screw the other guy harder than he's screwing you" then you have lost the ability to prosper through innovation and hard work, replacing it instead with a Tony Soprano world in which certain "privileged" people, either by political donations or outright grift are allowed to screw anyone they want with impunity while everyone else is forced to either risk being caught (and punished) committing their own scams or become a serial victim and have their wealth and earnings mercilessly stripped.

Elizabeth Warren's latest report was outlined on CNBS this morning as being focused on commercial Real Estate, but she also make clear her view on "tricks and traps" in all forms of finance - and on this point she is spot-on.  Pay attention about 2:50 into this clip:

Steve LIESman tries to go after Ms. Warren, but all he does is give her more opportunity to make her point - that the entirety of Wall Street, for the most part, has been focused on tricks and traps.

Gee, you mean in addition to not disclosing what was going into these securities that were sold off to duped investors (who ultimately lost their money) they were doing it to consumers too?

We cannot have a strong economy that is, at its core, all about trying to screw people.  If that's the premise on which your business rests, whether you're a commercial bank, Wall Street investment house or any other business then YOU SHOULD BE CLOSED DOWN.

Now tell me why THE MEDIA is siding with the tricksters and grilling those who are trying to put a stop to it.

While wishing for actual enforcement of these laws by the very politicians who lie to us every couple of years to get us to vote for them (cough-Eric Holder-cough!) may be asking for too much, what's not too much is for each and every one of us to REFUSE to do business not only with any firm that pulls this crap, but any firm that does business with those that do!

We the people can stop this - if we care to - it starts and ends with us.