Wall Street’s Rap Sheet Tells a Harrowing Story

There’s a serial killer on the loose.

This heartless criminal is slaughtering nations left and right.

For two decades, it’s been feasting on unsuspecting governments.

With each victim, its power grows.

And now, it’s at our front door.

The first reported crime occurred in 1982. That was the year when Mexico defaulted on its debt. For over two decades, Mexico and its Latin American neighbors had been borrowing money from American banks to finance their growing economies. The 1960s was a good time to be a finance minister south of the Rio Grande. Governments were flush with cash from the economic boom, largely financed by loans. When inflation drove U.S. interest rates into the double digits, Latin American governments found themselves with whopping interest payments. By the 1980s, they simply stopped paying the bills. Lenders fled, and a massive financial crisis swept through the region.

But interest rates eventually came back down, and the lenders returned. Again banks like Goldman Sachs lent money to the Mexican government, and again investors panicked. In 1994, another financial crisis struck Mexico and — in a so-called “tequila effect” — spread to Brazil. This time, the American government stepped in. Treasury Secretary Robert Rubin, who used to be the Co-Chairman of Goldman Sachs, engineered a $20 billion bailout that saved his old firm’s ass.

Meanwhile, on the other side of the world, the “East Asian miracle” was lapping up the money that was spilling out of Latin America. Hong Kong, Singapore, South Korea, and Taiwan — the “Four Asian Tigers,” they were called — were industrializing faster than any country ever before, and Wall Street was more than happy to slake their thirst for investment funds with the cool liquid of debt. Until, of course, the bubble burst. In 1997, it became clear that investors had been too optimistic and asset prices had gone too high, especially in real estate. Lenders ran for the exits, and the local economies took a bloodbath.

When the “East Asian miracle” turned into the “East Asian crisis,” investors started to question all their foreign holdings, especially the loans they made to the Russian government. Just to be safe, they fled Russia too, leaving the Kremlin no choice but to default on much of its debt. The shockwave rippled all the way to Wall Street, where the mammoth hedge fund Long-Term Capital Management nearly crumbled from a bet gone bad. Their bankruptcy probably would have brought down the global economy, had the big American banks not stepped in and bailed them out.

These titans of Wall Street were hardly daunted by this near-death experience. First, they plowed their money into the American stock market and then, when that tanked at the turn of the century, into the American housing market. This too fell, and with it, the global economy.

But that was not all they bet their chips on. Led by Goldman Sachs yet again, the American banks spread their money across Europe — trading with hedge funds in Iceland, buying up mortgages in Spain, and yes, funding a widening budget deficit in Greece. When the bubbles burst, tax revenues plummeted, and governments started running out of money. Without central banks to buy their bonds, several countries ran the risk of defaulting on their debt. But the powers-that-be didn’t want that. They wanted the big banks to be repaid. So they took it out on the workers, slashing government spending and making the recession worse.

Only one culprit has been present at all of these crime scenes. It doesn’t take a detective to see that Wall Street has been duping naïve borrowers into excess debt time and time again, only to get away with it and strike again in a new location. In fact, after each conquest, the American banks found themselves bigger and more powerful, systematically demolishing the regulations that had prevented them from such predatory behavior since the 1930s.

In recent years, we have developed an unhealthy habit of blaming the borrower, but there are two parties in every financial contract — and the lender is almost always the more experienced, more sophisticated, and more powerful of the two.

For far too many years, we have allowed our banks to run roughshod over the world. And now, while our nation grinds through high unemployment and Europe suffers through worse, the Republicans have the inexplicable gall to nominate a Wall Street tycoon as their presidential candidate. To these thugs, I say: Leave us alone. Haunt us no more. Haven’t you done enough?

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This op-ed was published in today’s South Florida Sun-Sentinel.

Why We Never See It Coming

“These were egregious mistakes. They were self-inflicted.”

Our strategy was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored.”

“Obviously we should have acted sooner.”

“It could easily get worse.”

Where have we heard this before?

Perhaps in March of 2011, when a massive earthquake and tsunami triggered a nuclear meltdown in the Fukushima prefecture of Japan. Or maybe it was April of 2010, when an explosion at a BP-operated oil rig led to an unprecedented oil spill in the Gulf of Mexico. Or it could be September of 2008, when the seemingly “too big to fail” Lehman Brothers filed for bankruptcy and threw the global economy into the worst recession since the Great Depression.

But actually the above quotes came from last week’s conference call when JP Morgan CEO Jamie Dimon admitted that the bank had lost at least $2 billion in recent derivatives trading.

Let’s face it: We’re bad at predicting crises. We never see them coming. Even when all the warning signs are flashing before our eyes.

In Dimon’s case, those warnings included public concerns voiced last month about the danger of placing a $100 billion bet in a $150 billion market, to which Dimon replied that it was “a complete tempest in a teapot.”

That’s a big friggin’ teapot.

So confident was JP Morgan that they estimated that the most they could expect to lose on this bet in a single day was $57 million. They have since revised that estimate to $129 million. Dimon conceded that the earlier risk model was “inadequate.”

Haven’t we had this debate before?

In the wake of the 2008 crisis, everyone on Wall Street admitted that their risk models were inadequate, that they didn’t consider the possibility of extremely large losses.

Yet here we are all over again.

The fact is, most of us are bad at predicting failure. We’re hard-wired to look on the bright side. It’s what neuroscientist Tali Sharot calls “the optimism bias.”

According to Sharot’s research, we tend to overestimate the likelihood of good events and underestimate the likelihood of bad events. That explains why newlyweds estimate their likelihood of eventual divorce at zero percent, despite a national divorce rate of 40 percent. It also explains why 75 percent of people are optimistic about their own family, but only 30 percent believe that families in general are better off than they were a generation ago.

Basically, we expect bad things to happen to other people, but not to us. Certainly this principle applied to JP Morgan where Jamie Dimon was hailed as the genius risk manager who steered the company away from the worst of the subprime debacle.

Upon learning of Sharot’s research, one fire captain told her, “Fatality investigations for fire-fighters often include ‘We didn’t think the fire was going to do that’ even when all the available information was there to make safe decisions.”

The same could be said about a wide range of disasters, from the Space Shuttle Challenger to the hedge fund Long-Term Capital Management, whose ill-fated gamble was eerily similar to JP Morgan’s. We really have been here before.

It’s brutally difficult to shatter people’s illusions. When people estimated their likelihood of getting cancer at, say, 10 percent, and Sharot informed them that it’s actually closer to 30 percent, they refused to raise their prediction above 11 percent. Science be damned.

In a way, that’s a good thing. Optimism makes us happier, and it makes us work harder. But it also exposes us to unnecessary dangers.

Sharot likens the predicament to jumping off a cliff. The optimist takes the plunge and may plummet to his death. The pessimist stays on the cliff and never experiences the joy of freefalling. The realist jumps off…with a parachute.

JP Morgan needs a parachute. We all need a parachute. Which is why regulations like the Dodd-Frank Act exist: To protect us when we accidentally jump off a cliff.

Let us not make the mistake of cutting the cord, as House Republicans are currently trying to do.

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This op-ed was published in today’s South Florida Sun-Sentinel.