After reading a few articles on Venture Beat and Yahoo! Finance I thought that I would write a quick blog about my opinion on why the financial meltdown is happening as well as what effect all this financial disruption will have on the tech space, in particular startup tech companies.
First and foremost, a quick discussion on why this all happened. Many people and news outlets have their own opinions and sometimes it’s not as comprehensive as it should be. First off, in 1998 Clinton repealed the Glass Segall act. This enabled investment banks and commercial banks to merge together, causing less oversight within the banking system. Secondly, Bush pushed for low income housing loans in 2002. This was part of his economic stimulus plan to re-instate growth within the economy. Over 5,000,000 subprime mortgages were given out to people that couldn’t prove that they had ANY income or ANY assets. We are finding out now that some mortgage brokers were listing welfare checks as declarable income… (Are you kidding me?) These new loans were chopped up into pieces and put into tranches; loans grouped together by rating depending on the credit worthiness of the people paying the mortgage. These, in turn, were put into larger groups called CDOs (collateralized debt obligations). These CDOs were sold to major institutional investors all over the world. Many investment banks also bought them, and due to the ‘magic of banking’ they were able to re-loan about 10x of the amount that the CDO was worth. Using modern day financial engineering, many of these CDOs, and other mortgage back debts, were the foundation for new derivatives (another story altogether) and leverage. Today around $500 trillion dollars worth of derivatives exist in the world and only $50 trillion dollars of currency exists worldwide. So when people took out loan shark interest rate mortgages and couldn’t pay them the system started to freeze up. We are currently facing the largest financial bailout in history and possibly one of the worst recessions ever.
Now that we have a grasp on the problem we can talk about the effect on tech. I think that there will be a large effect in the tech space in terms of user base speculative value play. The facebook style plan isn’t going to hold much traction and I think that web tech companies are going to need a clear path to dollars. Venture Capitalists are going to tighten up their belts and be even more risk adverse with investment due to the availability of money from high net worth individuals and institutional players who deem Venture Capital as high risk. However, on the flip side, startup tech is relatively insulated from the rest of the market and tech companies that get funded during rough times are more likely to continue to get money due to lack of new deal flow.
Anyways, that’s my two cents and I hope that Wall Street can lick its wounds and that the tax payers of America don’t have to hand over their wallets.
I’d love to hear your thoughts on the matter as well, so feel free to shoot me an email at bbilotta@dexrex.com.
Welcome!
Tuesday, September 23, 2008
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Easily Understood Explanation of Current Banking Crisis
Today's banking crisis is the THIRD trillion dollar plus
US-caused financial meltdown in the last twenty years.
Each one of these crises came into being through the same basic
mechanism...the fraudulent over-valuing of financial assets by
Wall Street - with a "wink and a nod" (and sometimes a lot more)
from the White House and Congress.
The fraudulently valued assets stimulate the economy, impart
the illusion of health and then, inevitably, the fraud goes
too far and the whole house of card comes painfully crashing
back to earth.
The three trillion dollar plus frauds were:
Fraud #1: The so-called "Savings and Loan Crisis" of the late 80s
Fraud #2: The so-called "Tech Bubble" of the late 90s
Fraud #3: The so-called "Credit Crisis" of today
*** How the scam works
The mechanism of these frauds is simplicity itself...
...Take a shaky financial asset and blow up its value
and then sell as much of it as you can.
In the "Savings and Loan Crisis," the instrument was junk bonds.
In the "Tech Bubble" it was Internet stocks.
In the "Credit Crisis" it was individual mortgages collected
into pools and then re-sold to investors.
In each case, normal, well established "bread and butter"
financial principles were consciously thrown away by Wall Street
with no hint of protest from federal regulators.
***The "Savings and Loan Crisis" dissected
Junk bonds caused the Saving and Loan crisis which
resulted in the US taking over the assets of hundreds of
banks and selling them back over time to the marketplace
at fire sale prices.
Junk bonds, which caused the "Savings and Loan Crisis" were
shaky bonds that were pumped up by deliberate misrepresentation
and what I call "staged dealing."
Bonds get their value from two things: the amount of interest
they pay and how safe they are.
"Junk" bonds have to pay higher interest because they are less
safe. Therefore, until the "Savings and Loan Crisis," savings
and loan banks banks were not allowed by law to buy them and call
them assets.
Reagan/Bush changed all this and then a group of Wall Street
fraudsters used the new loophole to kick off an orgy of junk
bond creation and junk bond selling to banks and insurance
companies.
The crooks would deal the junk bonds back and forth
amongst themselves thereby establishing their "value"
and then they'd sell them to outsiders. The bonds
then became "assets" which could be borrowed against
and leveraged to buy even more bonds.
When the bonds failed, the banks failed and in stepped the
US government to "fix" the problem that it created at the cost
of at least one trillion dollars to US tax payers.
Deja vu, eh?
***The "Tech Bubble" dissected
The instrument of fraud in the "Tech Bubble" was Internet
stocks, start ups in particular.
A stock gets its value from the underlying company's sales,
its growth and its overall prospects for the future.
Pre-tech bubble, companies used to have to prove themselves
by being in existence for several years before they could
be sold on major exchanges. That standard was thrown away
during the tech bubble.
To pump of their values, the companies engaged in
"staged dealing" just like the junk bond crooks.
Company #1 would "sell" 20 million dollars in banner
ads to Company #2 which would in turn "sell" 20 million
in banner ads to Company #1.
In fact, nobody sold anybody anything. Company #2 ran
ads for Company #1 and billed it for them. Company #1
ran ads for Company #2 and billed for an equal amount.
These should have been called media trades not sales, but
Wall Street was happy to claim them as legitimate cash sales
and then use the sales numbers to fraudulently value these
companies - many of them totally worthless - in the
hundreds of millions and sometimes even the billions.
***The "Credit Crisis" dissected
By now, you see how the scheme works.
It's not complicated at all.
You take near worthless pieces of paper (junk bonds, stock
of start up Internet companies, etc.) and declare them to
be good as gold.
Then you create as many junk bonds and Internet start up
stocks as you get and sell them as fast as you can.
In the case of our current crisis, the instrument of fraud
was so-called sub-prime mortgages.
Previously, sub-prime mortgages had very little trading value.
Only people in the sub-prime industry itself dealt in them and for
good reason. They're tricky to value and packed with financial
peril.
But Wall Street changed all that.
Wall Street said: "If we take LOTS of these mortgages and assemble
them into large pools and then slice and dice the pools in various
ways, we can sell the slices to banks and other investors as AAA
paper."
It sounds crazy, doesn't it?
If the underlying pieces of paper are garbage, how does assembling
a whole bunch of garbage into one place make it "better?"
It doesn't, of course, and this is a principle even a three year
old child can understand.
But greed and the need to pump up a shaky economy for propaganda
purposes are two very strong motivators.
Banks created these mortgage pools, sold them to each other,
and they by virtue of these "staged sales" declared them valuable.
Do you recognize the pattern now?
If you do, then you are now smarter than all the assembled j@ck@sses
who do financial reporting because they apparently can't - or
won't.
This is the THIRD trillion-dollar plus fraud driven financial
meltdown in twenty years and apparently no one in the financial
news media can see how it happened.
***But there's more...
Junk bonds were mass manufactured as fast as the crooks could
invent them. Ditto for Internet stocks.
But how did hundreds of billions of dollars worth of "toxic"
mortgages suddenly come into being?
Why did the mortgage industry change its lending standards so
radically and so suddenly to make their creation possible?
And why did real estate lending regulators in all 50 states -
because real estate lending is a STATE-level issue not a federal
- go along with it?
Here's where it gets very interesting...
The fact is state-level lending regulators were VERY concerned
about what was going on. They have been for years.
And they not only expressed their concern clearly, they also
took SERIOUS concerted legal action to stop lenders from making
bad real estate loans to their citizens.
(Most of the sub-prime loans in the news so much today were
designed to screw the people who borrowed the money and can
rightly be called "predatory" loans.)
Guess who stopped the states from enforcing their own time-proven
real estate lending laws and thus created the raw material that
made the current "Credit Crisis" possible?
*** The trillion dollar plus question
If you're a US taxpayer, you're going to pay for this fraud
so you might as well know who did it to you.
His initials are GB.
You know him well.
But perhaps more interesting is the name of the person who
single-handedly rallied first state attorneys general and then
fellow governors to fight the creation of these loans and who
in the process became Public Enemy #1 to the Bush Administration...
His initials are ES.
If you follow "silly" US political scandals, you'll recognize
his name instantly when you hear it.
And you will *finally* understand why he was quickly and
permanently assassinated politically earlier this year.
Had ES been allowed to "live," he would have been in position to
remind everyone every day of who made the current meltdown
possible.
Instead, he was silenced very effectively. Not with a bullet
in the back of the head, but the net effect was just the same.
So effective was his assassination that no one can even
mention his name in connection with today's crisis without
risking ridicule, or worse.
Last note:
The crisis this fraud has created is *exponentially* bigger
than the S & L and Tech Bubble combined.
It's not going to be resolved by a quick "patch up" and will
likely have the same impact on the current generation that the
depression of the 1930s had on its parents, grandparents and
great grandparents.
On that cheerful note, here's the big story everyone missed
this year and now you'll finally know what REALLY happened
and why:
go to www.911insidejob.net and watch videos on Federal Reserve Bank scam and the Bush Family involvement in de-frauding the consumer and this country.
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