The ‘failure of finance, insurance and real estate as the basis for economic recovery' is compounded by the reality that as ‘the foreclosure crisis continues, not only will millions in the USA lose their homes, but many countries who have been keeping their reserves in the US dollar will find that their foreign reserves are worthless,’ writes Horace Campbell.
In the book, ‘Too Big to Fail’, it is reported that on 13 September 2008, Larry Fink got on the plane to Singapore. The report on the saga of the week of 7-14 September 2008 further commented on his return after Henry Paulson and the government saved the big financiers by putting trillions of dollars in the financial system. Fink is of particular interest because not only is he the chairman and CEO of BlackRock, the largest money management firm in the world, but also because his role in the present foreclosure mess has been exposed that he is one of the key figures of the shadow banking system and the shadow government is being brought to light.
We are informed in a Vanity Fair article titled ‘Larry Fink’s $12 Trillion Shadow’ that BlackRock controls over US$12 trillion in assets, and this so-called money management firm is ‘A global colossus—with $3.3 trillion in assets under its direct management and another $9 trillion it supports.’ According to the same article, ‘BlackRock manages about $1 trillion of pension and retirement funds for millions of Americans and oversees the investments of scores of institutions around the world: from state and local governments to college endowments, from Fortune 500 companies to the sovereign-wealth funds of, among others, Abu Dhabi and Singapore.’ The public record informs us that ‘BlackRock was founded as BlackStone Financial Management within the private equity firm Blackstone Group in 1988. Larry Fink, BlackRock’s founder and CEO, joined Blackstone. Before joining Blackstone, Fink was a managing director at First Boston, where he pioneered the mortgage-backed securities market in the United States.’
BlackRock is a creature of the financial services industry and holds billions of dollars of bonds that consist of complex financial instruments. These are the instruments that form the basis of what is called derivatives, the new product that is at the core of the financialisation of the economic system. This financialisation is understood to mean the vastly expanded role of financial motives, financial markets, financial actors and financial institutions (stock markets, etc) in the operation of domestic and international economies. This financial sector has been the main force behind the ideas of neoliberalism because these ideas ensured that they had more unregulated economic power, but benefitted from the protection of the state’s military might. In this neoliberal world of militarism and finance, oil and pharmaceuticals, the role of speculators becomes more important than producers. Wall Street and the New York Stock Exchange stand at the heart of this web of finance and investment.
Companies such as BlackRock and other money management firms do not produce anything, they speculate, gamble with the savings of millions of persons and are in the world of make-believe securities called credit default swaps and derivatives. It is a world where the military power of the United States is necessary to protect the activities of these speculators.
It is to this company, BlackRock (whose leader pioneered the mortgage backed securities), that the US government gave the responsibility of overseeing the toxic assets of AIG and Bear Stearns, assets that were taken over by the US government to save the system by the Bush administration in the economic ‘coup’ managed by Henry Paulson in 2008. As a result, ‘through an array of government contracts, BlackRock has effectively become the leading manager of Washington’s bailout of Wall Street. The firm oversees the $130 billion of toxic assets that the U.S. government took on as part of the Bear Stearns sale and the rescue of AIG; it also monitors the balance sheets of Fannie Mae and Freddie Mac—which together amount to some $5 trillion—and provides daily risk evaluations to the New York Fed on the $1.2 trillion worth of mortgage-backed securities it has purchased in an effort to jump-start the country’s housing market.’
Now, with the foreclosure crisis replete with fraud and robo-signing, Larry Fink and those money managers who are tied up with the top persons in the derivatives market are being brought up in the news by none other than Bloomberg News for the inherent conflict of interests in the present foreclosure crisis.
In a long article entitled, ‘New York Fed Faces “Inherent Conflict” in Mortgage Buybacks’, we learn that the New York Federal Reserve, which acquired mortgage debt, has been calling on Bank of America to buy back the bad debts:
‘The New York Fed and big private investment firms Blackrock and Pimco have even gone so far as to suggest that Bank of America should be forced to buy back some portion of the loans they originated. But this is obviously a result of the fact that these entities hold billions worth of BofA originated bonds and derivatives, and thus need to jump into the fray to ensure that they don’t lose out in case their bonds actually become worthless.’
This tangled web becomes more complex when we learn that the same Blackrock owns a large chunk of Bank of America, the bank in the US at the centre of the storm over the foreclosure crisis. Bank of America services over 14 million mortgages in the USA, with a paper value of over US$2.1 trillion. But this paper value is questionable so that the bank limps on daily basis with the knowledge that the political clout of the financial services sector will ensure another government bailout when the paper value turns out to be as toxic as that which was in the hands of Bear Stearns or Lehman brothers.
Put another way, the Fed and BlackRock are asking Bank of America to buy back some of the loans they originated. But Blackrock owns a large share of Bank of America. In short, the foreclosure crisis has brought out the whole mess of securitisation that was at the heart of the financial crisis of 2008.
The fact that the banks and investment companies and the Federal Reserve Bank of New York are all enmeshed in this cascading scandal brings the question of finance capital away from theoretical discussion to the reality of whether the bankers and financial oligarchs will have their way, come what may.
Peter Fisher, presently one of the executives of BlackRock is another scion of the toxic financial oligarchy that has moved in and out of BlackRock and the Federal Reserve System. Formerly an undersecretary of the treasury, Peter Fisher has also worked for the Federal Reserve Bank of New York, where he was responsible for all of the Federal Reserve's open market and foreign exchange operations. Readers will remember that Tim Geithner, the current treasury secretary, was formerly the chairperson of the New York Fed and that it was under his watch that the government gave BlackRock the responsibility to oversee the toxic assets of AIG, Bear Stearns and the other fallen speculators. The Federal Reserve System is populated with executives who work to protect the banks and investment firms. The history of Goldman Sachs and their deployment of functionaries to run the government over the past thirty years is an abject lesson of how the bankers dominated the government of the USA. Why should all of this be of interest to citizens all over the world? It was Thomas Jefferson who warned that ‘banking institutions are more dangerous to our liberties than standing armies.’ And this is playing out before our eyes.
FEDERAL RESERVE SYSTEM
The New York Fed plays a key role in the US economy because it is owned and managed by the financial oligarchs and is supposed to oversee many of the biggest Wall Street bank holding companies, including JPMorgan Chase & Co, Goldman Sachs Group Inc, and Citigroup, etc. There are 12 regional federal reserve banks but the New York Fed is of particular importance because this is the one branch of the Fed that oversees the international financial system and works to protect the dollar to ensure that the US dollar remains the currency of international trade. This bank holds the foreign exchange reserve of 60 per cent of the countries in the world that are enmeshed in the dollar zone. In other other words, the New York Federal Reserve Bank is like a central bank to many central banks around the world.
The European Union created the Euro to challenge the power of the dollar as the currency of world trade but with the assistance of the British and the International Monetary Fund (IMF), the US government has been able to fend off challenges from the Euro. Most poor countries have been bullied by the IMF to restructure their economies through structural adjustment; but these structural adjustment exercises have been to support the US economy and to ensure that the US remains the number one capitalist state in the world. The USA holds more than 60 per cent of the world’s reserves while the Euro controls 24 per cent. The other 16 per cent belongs to societies such as China, Cuba, Russia and North Korea that tenuously remain outside of the dollar and Euro zone. It is because of the linkages between the speculators and the dollar that the Bank of the South has been established so that some of these countries, such as Venezuela and Bolivia can delink from the dollar. There are many who believe that the military invasion of Iraq was precipitated by the decision of the government of Iraq in 2000 to convert Iraq’s foreign currency reserves from US dollars to Euros. The leader of Iraq had announced all Iraq’s future oil trades would be conducted in Euros instead of the dollar (See: ’The Economics behind the Iraqi Invasion’). Up until today, the US government remains vigilant as societies in OPEC threaten to conduct oil (and other international transactions) in Euros.
US MILITARY AND THE FINANCIAL SECTOR
If such a threat were carried out, it would pose a major challenge to the dominant position of the US dollar. Slowly, Shanghai is building up as an alternative financial sector to rival Frankfurt, London and New York combined. It is important to underline the reality that when the US achieved its position as the central banker of the world after the Second World War, the US economy was the strongest in the world and the US agreed to back up the dollar by keeping one ounce of gold for every 35 dollars printed. After the US exhausted itself in Vietnam, the US could not guarantee this fixed exchange rate so since the 1970s, the US dollar has operated at a flexible exchange rate. In practice this means that the US government has been able to print dollars at will and that the principal guarantor of the US hegemonic position became the US military.
It is for this reason that there is a close relationship between capital management firms such as the Carlyle Group and the US military industrial complex. One way to understand the presence of US military personnel in Europe, especially Germany, is to grasp the reality that the US fears the Euro becoming a global currency. If the euro becomes a global currency to rival the dollar, there would be such turmoil in the international economic system that the effects will have permanent damage to the US economy.
The present financial crisis is forcing the leaders of the US to either manage the decline of the dollar gracefully or maintain the dollar through brute force and US military bases all over the world.
CONFLICT OF INTEREST
When the financial services sector imploded after the days of September 2008 when the old investment houses collapsed, the real challenge of the full restructuring of the US economy was postponed when the government bailed out the firms with trillions of dollars. However, the hole that was dug was so deep that it was bottomless, so that no amount of bail out could restore the banking and money management firms to a healthy status. It was this reality that ensured that the bankers were working very hard to maintain this political power in the society. That power became punctured once again as the news of the foreclosure crisis brought to the fore the fact that the banks and financial entities such as GMAC could be forced to write off the losses from foreclosures (as it legally should). If the banks and financial entities did write off these bad loans as bad loans, the leverage of these banks would be so far into the red that they would have no option but to go bankrupt. Every day since 15 September 2008, the banks have lived with this reality, and it is for this reason that the banks must have a president in the White House and a Congress who will again bail out these financial intuitions when the true position of the value of the assets becomes known.
It is now clear that there is a conflict of interest between the Federal Reserve System and the banks because the same federal reserve, such as the New York Fed and Richmond Fed hold Mortgage Backed Securities (MBS – the ones pioneered by Larry Fink), while acting as the agency to assure a safe and sound financial system.
The fact that Bloomberg News and other investment sheets are writing about the conflict of interests brings to the fore the delicate nature of the crisis in the US financial sector. Neil Barofsky in his report to Congress has outlined the levels of fraud he discovered as inspector general of the Troubled Assets Recovery Program (TARP), and has testified before Congress on the different layers of fraud in the real estate market, in the insurance industry, in the banks, and among all those who were involved in the speculation that is called free market capitalism. The struggle for the Congress is to ensure that there are no hearings that will give voice to officials such as Neil Barofsky and Elizabeth Warren. In fact, Warren is feared because as the head of the new consumer agency she would have the authority to bring out the full extent of the manipulations of the banks.
This extent of fraud and the unhealthy nature of the US banks have been compounded by the foreclosure crisis.
In most capitalist countries, a foreclosure process on a residential mortgage begins when the home-owner defaults on the payment of the monthly mortgage. In times of economic crisis when millions are unemployed, this foreclosure process intensifies as millions lose their homes. Under normal circumstances, this foreclosure process entails a number of clear steps: (a) notice to the home owner of non-payment (b) a demand letter sent by the bank or financial agency holding the mortgage (c) a legal notice of default and then (d) repossession of the house pending resale. There are three classifications of foreclosure filings: Default notices, scheduled foreclosure auctions and bank repossessions (called repos). After the third action (repo) is completed, the properties are known as REO (Real Estate Owned) properties until the bank can resell them. The foreclosure crisis in relation to residential properties has been in the news, but hidden behind this is the looming crisis for commercial properties. But this is a story that is yet to come. Usually, a borrower (home owner) faces eviction from their home after missing three months of payments to the banks. By the end of 2009, almost 3 million homeowners received at least one foreclosure filing during 2009, setting a new record for the number of people falling behind on their mortgage payments. One report noted that the foreclosures of 2009 more than doubled that of 2007. The total number of foreclosure filings in 2009 was 3,957,643, involving 2,824,674 properties.
The states at the centre of the housing boom, Nevada, Arizona, California and Florida, were at the centre of the collapse of the bubble carrying the majority of the foreclosures. It is anticipated that by the end of 2010 more than seven million homes will be in foreclosure. This crisis is compounded by the fact that nearly 11 million homes are ‘underwater’ – that is, the houses are worth less than the amount owed on them. According to one report from an international bank, some 20 million homes will be underwater by the end of 2011.
When the Federal government established the Troubled Asset Relief Program (TARP) in 2008, the government later established the Making Homes Affordable (MHA) program. This was a program that was supposed to assist homeowners to stay in their homes. This program has failed to assist homeowners and the banks were able to manipulate this federally supported program to ensure that they were paid regardless of what was happening to families in the midst of a depression. Because of the depth of the depression, and with hundreds of billions of delinquent mortgage loans still on the books, banks are now trying to recover whatever money they can by stepping up the foreclosure process. ‘While a house may be worth substantially less than the price it fetched four or five years ago, the banks are anxious to repossess it and sell it for what they can get, rather than eat the losses.’
It is this anxiety that led to the banks initiating foreclosure processes without due respect to the law. The same securitisation that allowed the banks to bundle the mortgages and sell them off to money management firms and to mutual funds meant that the banks did not know who really owned the mortgages. Hence the whole exercise of foreclosure reeked with fraud and what is called robo-signing, where some mortgage servicers have been signing off foreclosure documents without actually reading them, or doing so without the presence of a notary. According to the Washington Post, agents engaged to check that foreclosure documentation was valid and complete had been ‘signing off at a rate – 10,000 per month – where they could not possibly have carried out the checks they were required to do. One “expert” witness – Jeffrey Stephan – claimed he’d been doing this for the past 5 years, while acting for GMAC, J.P.Morgan Chase, and several other banks.’ Robo-signing is one more instance of fraud and malfeasance by the financial oligarchy.
As early as 2007, Gretchen Morgenson of the New York Times was writing that, ‘The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.’ Three years later she was still writing on the recursive processes from securitisation and wondering why no one has been put behind bars for the actions of the banks and mortgage companies. In a recent article entitled, ‘One Mess that Cannot Be Papered Over’, she wrote that:
‘LAWYERS representing delinquent homeowners have been shouting for years about documentation problems in residential mortgages. Now that their complaints have gained traction with investors, attorneys general and some state court officials, the question of consequences looms large. Is the banks’ sloppy paperwork a matter of simple technicalities that are relatively easy to cure, as the banks contend? Or are there more far-reaching consequences for banks and the institutions that bought mortgage-backed securities during the mania? Oddly enough, the answer to both questions may be yes. According to real estate lawyers, most banks that have gotten into trouble because they didn’t produce proper proof of ownership in foreclosure proceedings can probably cure these deficiencies. But doing so will be costly and time-consuming, requiring banks to comb through every mortgage assignment and secure proper signatures at each step of the way — and it surely will take much longer than a few weeks, as banks have contended.’
I have quoted extensively from the mainstream press because this topic was not being written on by a radical left writer. By the end of September 2010, the scandal of the documentation problems in the foreclosure process was so widespread that several big banks declared a full or partial moratorium on foreclosures. Bank of America called a halt on proceedings across the US, while PNC Financial, JPMorgan Chase and Ally Financial's GMAC Mortgage unit stopped foreclosures in the 23 states where a judge must approve all such proceedings. It was in the face of the widespread fraud and abuse that 50 attorney generals in the US are suing the banks for illegal foreclosure.
But with the midterm elections showing that the Republicans may control the House of Representatives, Bank of America has thrown caution to the wind and resumed foreclosures because if they did not appear to be collecting, the bond-holders would be calling in their investments.
HOME OWNERSHIP AND PRIVATE ENTERPRISE
The inherent conflict of interest between the role of the central bank and the BlackRocks of the world has now been compounded with the question about what is called law in the US. For centuries, the idea of owning a home has been sacrosanct in the US. This idea has been grounded in the so-called concept of private property. Now the citizens of the US are faced with whether the banks and the military are more important than people owning their homes and guarding their property. It is this major contradiction that is being played out in the midterm elections in the US. The banks, the billionaires, the oil companies, and the military want to ensure that at all costs the depression is borne by the citizens of the world and the poor in the USA. This is why in the midst of the deepest depression in 70 years, the military budget of the US increased while there were cuts in education, health, and all other sectors of the society.
Unlike the last depression of the twentieth century, the rise of China, India, Brazil and other centres of power outside of Frankfurt, London, Paris and New York has created a new dynamic in international politics. This means that the New York Fed along with their allies in Britain, Germany, and France cannot simply intensify the exploitation of Africa, Latin America, and Asia. Within Europe, it is the British who have taken the lead to intensify the oppression of the working people in order to save the banks. In France, the workers and the students have been mobilised to place the question of the banks at the centre of the political struggle. In the US, the popular upsurge which led to the election of Barack Obama is being consciously rolled back by the bankers, the billionaires, and the militarists who do not want to see black, white, brown, and Asian workers coming together. Racism, Islamophobia, and anti-immigrant instigations have been the tools to confuse the white working class so that attention is turned away from the banks and the insurance companies.
In the present midterm elections, one congressional representative sought to raise the question by speaking about taxing billionaires. In the elections, issues such as capital gains tax and stock transfer taxes are not on the table, Representative Tom DeFazio from Oregon raised the possibility of bringing to the fore the taxes on sales of stocks. When the rep put this out as part of his campaign, one capitalist from Long Island was willing to contribute US$150,000 to defeat him. It is in New York where there is the highest concentration of billionaires where no mainstream party has raised the question of taxing the BlackRocks of this world. Howie Hawkins of the Green Party has been the only politician bold enough to raise the question of a stock transfer tax. This would be a tax on gains from the stock market. One per cent tax on stock profits in the state of New York could wipe out the deficit of the state. But no politician in New York from the mainstream party dares to raise this question. Even some sections of the left media remain afraid of raising this question.
There are so many front organisations for the billionaires that the citizens do not know what is a genuine grass roots organisation. Citizens United describes its mission as being dedicated to restoring the United States government to ‘citizens' control’ and to ‘assert American values of limited government, freedom of enterprise, strong families, and national sovereignty and security.’ It is this organisation that brought a case before the Supreme Court of the USA .The new ruling passed by the Supreme Court allows unlimited contribution by capitalists to win elections.
US DECLINE AND THE FUTURE OF THE DOLLAR
In the film, ‘Capitalism: A Love Story’, there is the scene where Michael Moore goes to the headquarters of Goldman Sachs to carry out a citizen’s arrest of Blankfein and the other executives of this bank. The intent, through the medium of entertainment, was to lift the consciousness of the US workers to the crimes that were being committed by the bankers who were too big to fail. Bernard Madoff was made a sacrificial lamb while the other big sharks are still in the waters of speculation and militarism. This failure of finance, insurance and real estate as the basis for economic recovery is now compounded by the reality that every day as the foreclosure crisis continues, not only will millions in the USA lose their homes, but many countries who have been keeping their reserves in the US dollar will find that their foreign reserves are worthless. This merging of the financial crisis in the USA with the crisis for the dollar poses a great danger to the world economy and it is not a matter if countries will delink from the dollar, but when.
The financial oligarchs understand this and hence the necessity for the military build-up for US hegemony, regardless of the cost to humans everywhere.
All of this is to say that the extreme conservatism that is being witnessed in the US today is not simply the result of the racist reflex by poor whites, but part of the conscious manipulation by the media moguls along with Wall Street barons and those that have insatiable appetite for militarism to confuse the people. The rhetoric has been retched up so high that incidents of violence reported in the campaign is only a harbinger of more serious confrontations to come if measures are not taken to educate the people that their economic woes are caused by the fraud and criminal activities of the banks and the glorified financial oligarchs. Barack Obama has been campaigning but his campaign will be meaningless as long as he elevates people such as Tom Donilon to be the National Security Adviser. Donilon has footprints in the mortgage business. According to Robert Scheer, ‘As the chief lobbyist for Fannie Mae from 1999 to 2005, Tom Donilon was far more intimately involved than Paulson in the manufacturing of this financial and mortgage mess. He successfully pressured Congress to give Fannie Mae the green light to speed past any sound regulation,’ In a democratic and accountable society, Tom Donilon would be investigated and cast out of public service but such is the quality of persons that Obama choose to advise him on National Security.
Obama is not only trapped in the midst of financial oligarchs turned advisers, by their counsel, he is consciously serving the interests of the corporate fraudsters. Obama genuinely believes that saving the fraudsters will save the US economy. It is this misguided liberal belief that can only be clarified by a mobilised and educated population.
The midterm elections in the USA are being watched as the Obama administration finds itself in the midst of a transition. The transition is torn between peace and war. Whether the reflex to war and repression wins will depend on the extent to which the peace and justice forces bring BlackRock and the shadow government out in the open so that the fraudulent and speculative system can give way to a new system that places human beings at the centre of the economy.
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* Horace Campbell is a teacher and writer. His latest book is 'Barack Obama and 21st Century Politics: A Revolutionary Moment in the USA', published by Pluto Press.
* Please send comments to [email protected] or comment online at Pambazuka News.