The Big Short

The Financial Collapse as Traumedy*

by Bill Barclay

The behaviour of our money people is still treated as a subject for specialists. This is a huge cultural mistake. High finance touches – ruins – the lives of ordinary people in a way that, say, baseball does not, unless you are a Cubs fan. And yet, ordinary people, even those who have been most violated, are never left with a clear sense of how they’ve been touched or by whom. Wall Street, like a clever pervert, is often suspected but seldom understood and never convicted. It is my hope that Adam McKay’s The Big Short might actually help change this situation.

— Michael Lewis, Vanity Fair, 12/31/2015

And he may just be right.

Michael Lewis is at it again. Lewis, who spent a few years at (the now defunct) Salomon Brothers in the late 1980s, and resigned to write Liars’ Poker about the financial excess of that decade, has never lost either his fascination or his disgust with finance and Wall Street. In 2010 he wrote The Big Short: Inside the Doomsday Machine, a book that described how the financial sector created, and in turn was almost destroyed by, the U.S. housing market bubble and collapse.

The book tried – and actually did a pretty good job – to explain such esoterica as securitization, collateralized debt obligations, synthetic CDOs, etc. But it didn’t seem like a good candidate for a movie. Any cinematic possibility seemed even less likely as time passed and the clarity of our actual experience faded in our collective memory. Blurring and fading our memories, was, of course, aided and abetted by the financial elite and right-wing think tanks that have worked diligently to recast our memory of the 2007-08 financial crisis into one of a spendthrift public sector and misguided governmental policies designed to help low-income families buy houses by compelling mortgage lenders to make loans that would never be repaid.

The Big Short, the movie version, brings everything back into focus and strips away the lies and the obfuscation. In this film, one of the two best that I’ve seen about the events that threatened the world financial system (the other being Inside Job), we meet again the actors and actions of the institutions at the core of the U.S. financial sector. And we see clearly the perversity of the IGB/YBG** culture that ruled the lending, the packaging, the rating and the selling of that most boring of bank lending products, the home mortgage.

But, unlike other accounts, we see this mostly from the perspective of a few people who decided that the whole structure was rotten and who figured out a way to take a short position, betting the whole mortgage market would collapse. The film actually uses a tower of building blocks to represent the securitized mortgages, with the foundation being the ones rated BB or worse, propping up the AA and AAA portions (“tranches” in finance speak). The film may overplay a bit the scene where the smart guys meet with an employee of S&P, an agency that insures against risk, whose opaque glasses protect against light. But you do get the point. Most of the people we meet are not particularly nice, partly because of their cynicism but also for a larger reason: If they’re right, a very large number of people are going to be hurt. Their success is predicated on the destruction of the dreams of millions of families.

Mortgage lending was boring. It was the epitome of the old 3-6-3 description of banking: borrow at 3%, lend at 6%, on the golf course at 3. In the new world depicted brilliantly in the film, mortgage lending is all about short-term profit making, lending to anybody who walked in the door (we meet a stripper who “owns” 5 houses) and selling to your and my pension fund the resulting packages of loans, suitably blessed by the holy water of a AAA rating by S&P, Moody’s or Fitch. And to a surprising number of bank traders who should have known better.

The film takes us into the “sand states” (Florida, California, Arizona and Nevada) that were at the heart of the housing price bubble as one of the protagonists discovers empty housing developments as well as the suites of firms such as Morgan Stanley and the Las Vegas convention of mortgage brokers. In the latter locale one of our unlikely heroes tries to tell an unreceptive audience that doom is nigh.

But he was too early. Part of the drama of the film is that those taking on a short position were early in the game. And, as one established fund manager says in anger, “Being early and being wrong are the same thing.” The short positions seem stuck, mortgage defaults are escalating and foreclosures are rising but the shorts are still losing money.

How is that possible?

In an opaque market where prices are set by a small number of very large entities, those setting the prices were also those holding long positions. In Lewis’ account, the short positions began to gain in value only after firms such as Goldman Sachs and Morgan Stanley were able to unload more of the toxic junk and acquire their own short positions.

And then Bear Sterns collapses and the money starts flowing into the short accounts.

See the film. You’ll come away with a renewed commitment to reducing the power and role of finance in the U.S. political economy. Perhaps by your choice of who to vote for president??


 

* Traumedy – a mixture of tragedy and comedy.

** “I’ll be gone, you’ll be gone” – the expression used by people in the financial sector to dismiss the possibility that they would be around to face the consequences of their lending practices.


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A Note on Taxing the Wealthy

The ACA Proves It Can Be Done

by Bill Barclay

The news item that has excited many economists –- you can be excused for missing it –- was the release by the IRS of the data on income and taxes for the 400 highest income filers in 2013. Of course it was interesting to learn that the income needed to be admitted into this select group dropped to a mere $105 million (AGI), down from $135 million in 2012, undoubtedly letting in a lot of riff-raff.

But, the big number was the effective tax rate: 22.9%. Now, you may be thinking, “What? … Why was it so low?” But in 2012 it was only 16.7%. The revenue difference? More than $6.5 billion or about $16.5 million for each of the 400 filers.

Did the 400 simply decide to come clean and pay up? Hardly. The increase came about for two reasons: first, the expiration of the Bush tax cuts on the highest income groups and, second, the Affordable Care Act (ACA, aka Obamacare).

I see the perplexed look on your face –- Obamacare? Yes, because the ACA contained two little-noticed, by many, very progressive tax regulations designed to finance Medicare. The first is a 2.35% tax on wage income above the usual cut-off for Social Security and Medicare, $118,500 in 2016. This tax raised only a modest amount from our 400 because most of their income is not in the form of wages and salaries. But a second Medicare tax of 3.8% that covers both investment and wage income did raise a lot of money from this group. And all of us should welcome a tax that doesn’t privilege unearned income over wage income because it reverses the trend in tax policy that goes back to the Reagan days.

And you wonder why they want to repeal the ACA.

Petitioning for Sanders

by Tom Broderick

Petitions to put Presidential candidate Senator Bernie Sanders on the Illinois Primary Ballot won’t be submitted until January 6, which is just after the deadline for this article. The same holds true for delegates that we will elect to join him at the Democratic Party National Convention in Philadelphia in July later this year.

We hope to have one Chicago DSA member on the ballot as a Sanders delegate from the 6th Congressional District (CD): Alexander Franklin. The 6th CD is represented by Republican Peter Roskam, so we are very excited that Alex may go to Philadelphia and represent the views of Democratic Socialism from such a right wing stronghold.

Illinois will send 156 of 182 delegates to the Democratic National Convention (DNC) pledged to vote for particular ­Presidential candidate based on the results of the vote tally from the March 15 Illinois Primary. Not only is it critical to vote for Bernie Sanders for President, you must look for the delegates pledged to vote for Bernie. Look for the Sanders’ delegates on your primary ballot and be sure to vote for them.

The remaining 26 delegates to the DNC will be officially designated as “Unpledged.” These are “Political Leaders and Elected Officials” (PLEOs) and will be made up from 14 Democratic National Committee members, 11 Members of Congress (1 Senator and 10 Representatives) and one Distinguished Party Leader (President Barack Obama). One reason to send the maximum number of electable Bernie delegates to Philadelphia is to influence these few “Unpledged” Super Delegates.

Working independent of the official Bernie Sanders’ Presidential Campaign, Chicago DSA had comrades and friends circulating delegate petitions in the following Congressional Districts: 1 (Bobby Rush); 4 (Luis V. Gutierrez); 5 (Mike Quigley); 6 (Peter Roskam); 7 (Danny K. Davis); 8 (Tammy Duckworth); 9 (Jan Schakowsky); 11 (Bill Foster); 14 (Randy Hultgren) and 16 (Adam Kinzinger).

Elected Bernie delegates can influence the DNC. 102 delegates are to be pledged to presidential contenders based on the primary results in each CD. The more Bernie delegates sent to Philadelphia the greater their/our influence at the DNC. Rep. Jan Schakowsky will be a PLEO. She came out early for Hillary, but there are many voters in the 9th CD who mistrust Hillary’s deep ties to the world of trans-national investment and banking. Sending all of the elected Bernie Delegates to Philadelphia will deliver to Rep. Schakowsky a strong message in support of democracy.

Bernie delegates from districts that are heavily Republican can also sway events at the DNC. Sending a slew of Bernie delegates to the DNC from these districts will strengthen the voice of democratic values regardless of the upchuck delivered at the Republican National Convention. Voting for Bernie and his pledged delegates will only sow seeds for the future.

My appreciation to all the friends and comrades who freely gave time and energy in response to Chicago DSA’s outreach to get Bernie’s delegates on the Illinois Primary ballot: Giudi Weiss, Alec Hudson, Tom Ladendorf, Norm Groetzinger, Alexander Franklin, Sydney Baiman, Bill Barclay, Pat Dooley, Judith Gardiner, Paul Sakol, Hilda Schlatter, Diane Scott, Peg Strobel, Tom Suhrbur, Holly Graff, Tom Simonds, George Kazda, Gary Hagen and Dave Rathke. Hopefully I haven’t missed anyone that I knew helped, but if so, mea culpa.

The number of valid signatures to get Bernie on the Illinois Democratic Primary ballot was 5,500. Nearly 10,000 signatures were collected. Delegates for the ballot required 500 valid signatures from their respective Congressional Districts. In the CDs where Chicago DSA had petition circulators the unofficial counts are: more than 850 in the 1st, almost 800 in the 4th, more than 1,100 in the 5th, more than 1,300 in the 6th, more than 1,100 in the 7th, more than 700 in the 8th, more than 1,500 in the 9th, more than 1,000 in the 11th, nearly 1,000 in the 14th and almost 700 in the 16th.

Any who read this and worked for Bernie’s campaign know that elections are but one step in the process of bringing forth democratic socialism. DSA is part of that process. Bread and Roses together breathe democratic socialism. There will be more work to do whether or not Bernie Sanders is elected President of the United States.


Editor’s Note: Paid for by Chicago DSA and not authorized by any candidate or candidate’s committee. Dig it?


 

For more information on the delegate selection process, CLICK HERE.