The Looting of America

The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions and Property, Les Leopold, Chelsea Green Publishing Co., 2009

With America in the economic doldrums, a lot of attention has been paid to artificial financial instruments, called derivatives, created by Wall Street. No one has tried to explain them in plain English, until now.

Your local bank puts together a financial security pooling 10,000 debts (mortgages, credit card debt, car loans, etc.). That is a collateralized debt obligation, or CDO. An investor would get a portion of the interest owed by those 10,000 borrowers. There is always a risk that some borrowers will default on their loans, supposedly reduced by bundling together so many loans. The amount of interest an investor gets is based on the amount of risk they are willing to accept.

Of course, the bank has sold that security, or pieces of it, to other banks, municipalities, pension funds; anyone it could seduce with promises of high profits, with little or no risk. The security had been given a high rating by one of the major credit rating agencies, in exchange for huge fees, when such a rating was totally unjustified. Large numbers of borrowers start defaulting on their loans, because the local economy is in big trouble, and the bank is on the hook to pay off the security based on all that debt (not to mention being on the hook for the original debts). Unfortunately, the bank does not know the size of their obligation, because there is no public listing of derivative prices. They can't sell the security at any price, because the other banks are also in trouble.

Move that bank to Wall Street, and multiply the problem by trillions of dollars per day, and you get some idea of the size of the problem. Those who still worship the free market say that government intervention is the cause of all this. All that credit card debt, and all those homebuyers who defaulted on their mortgages, knowing that they could not afford them, are what drove the economy into the ditch, not Wall Street. Simply cut taxes on the rich, reduce or eliminate government regulations on business, and the market will take care of itself. Nonsense, the author says.

He advocates greater transparency in derivatives, including a publicly accessible list of prices, and keeping them on an institution's regular books, not "off the books." He also calls for salary limits, and a consumer watchdog agency with teeth.

Finally, someone explains how the economy almost collapsed (in plain English). This is an excellent and eye-opening book that is very much worth reading.