Friday, July 10, 2009

Blood Dries Quickly

"But blood dries quickly, at least the blood of ordinary investors. If any journalists recalled the shenanigans of Milken's friends ... no one wrote about it in the national press." — Ben Stein, A License to Steal
When Michael Milken started issuing junk bonds ("high yield bonds") I was in college, studying Political Science, trying to figure out why the world was such a mess and what might be done about it. A decade and a half later, when Milken's empire went down in flames, taking a good section of the Savings and Loan industry with it, I was in Earth First! and the IWW, trying to save the old-growth forests of northern California from Pacific Lumber. That company had been taken over by Charles Hurwitz, using junk bonds and money he had looted from a Texas savings and loan or two.

I had learned a thing or two about business in that interval, mostly by accident, mostly from taking odd jobs, a bit from reading books, and not just Das Capital and Wealth of Nations. And I had taken Economics 101 and 102 in college. I had worked as a paralegal on the bankruptcy of OPM (rumored to stand for Other People's Money), on the economic meltdown related to nuclear reactors known as WPPSS, on the trial of a drug that caused birth defects, and on writing trusts for wealthy people, among other things.

Chang the names of the players, and substitute mortgage-backed securities for junk bonds, and Presidents Bill Clinton and George W. Bush for President Ronald Reagan, and you have a book about 2008 and 2009. Ben Stein's A License to Steal came into my possession more or less by accident a few weeks ago. Published in 1992, it illuminates exactly what is needed to keep financial predators from ruining the economy for the rest of us. The public is, for the most part, not in a position to defend itself against unscrupulous, well-versed liars who have the ability to create securities.

But even after the U.S. government used our taxpayer dollars to make whole the savers at the savings and loans; even after people lost their retirements when junk bonds issued by Milken and held by insurance companies went bad; even when stock holders lost their investments as Milken's friends pillaged well-known American companies, the government did nothing. Worse still, under President Clinton, then under President Bush, the "deregulated" securities markets to a far greater extent.

The popping of the Internet stock bubble in 2001 did not even give Congress, the Federal Reserve, or either major political party pause. The Internet bubble was caused mainly by investor stupidity, but the housing bubble that followed was engineered by the Federal Reserve's low-interest rate policy combined with the "magic" of collateralized debt obligations backed by mortgages that would be impossible to pay off. That little business is mentioned in Stein's 1992 book, but it took a decade to mature into full-scale fraud.

As with the Milken era, most of the people responsible will not go to jail. They have been allowed to say they are sorry. In a showing of political crassness (after Crassus) that would have humbled even the great humbug politicians of 1992, taxpayer money is being used to pay the salaries of the very group of bank executives who scammed the public and the government.

That is the only reason Obama and the Democrats are pretending to do anything about health care. The health care crisis is serious, but if they do anything, they will just move the deck chairs around. While you watch that, you will be forgetting. Forgetting about the national debt, forgetting about how the Democrats were even more eager to bail out the rich fraudsters than the Republicans. After all, it is Republicans who are going to be hit hardest with the tax bill.

Believe it or not, many Republicans are honest. They worked honestly hard for their money and kept their belts tight for a time in order to be able to save and invest. They are mad as hell, and don't believe the Republican Party should be bailing out con artists. Of course they also were choked with their own rope, the fine spun hemp of deregulation and free market fantasy economics.

Blood dries quickly, especially the blood of small-time investors. I wrote an article back in 1996, Charles Hurwitz's Money, that explained how he went from being a small time guy to being a mogul. In short, he defrauded people - people who bought insurance from him, investors in companies he gained control of, tax payers - and defended himself with an army of lawyers. He has not spent a day in jail.

If you live in the hood, mark this lesson well. The drug trade is highly competitive. When all is said and mortality is taken into effect, if makes only ordinary profits. If you really want to make money, study the the Michael Milkens, Charles Hurwitzes and Stanley O'Neals of the world. You can make all the money you want, buy all the lawyers, journalists, and Senators you need, and almost never, ever, go to jail.

If you are an ordinary person who has managed to save some money, keep in mind the old adage about investment deals: if you don't know who the sucker in the deal is, it is you.

I believe that this economic downturn will most likely end, but I cannot entirely discount a long recession or an even greater upheaval. The debt of the group of madmen that calls itself the United States Government is probably unpayable. Some day, when people realize that, there will be hell to pay. Hopefull the citizens of this country will refuse to pay it. Isn't there some old American maxim, No Taxation Without Representation? Do you feel represented?

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