America's Last Wake-Up Call
Monday, December 15, 2008 3:33 PM
During the Cold War democratic capitalism had competitors breathing down its neck in the form of socialism and communism, which kept it on the straight and narrow. But no sooner was the Cold War over than all restraints were abandoned. In the 1990s Russia's new capitalist system quickly morphed into Russian organized crime, which went global.
In the United States, democratic capitalism gradually morphed into casino capitalism and, more recently, bandit capitalism, which scored some spectacular successes. Fortune magazine named Enron "America's most innovative company" for six consecutive years. In just 15 years Enron grew from nowhere to be America's seventh-largest company, employing 21,000 in more than 40 countries. But Enron's success was an elaborate scam that drove it into the biggest bankruptcy case in U.S. history and brought down the auditing giant Arthur Andersen for destroying evidence of its relationship with Enron — and left all its employees sans savings or pension plans.
Enron, WorldCom, Tyco, Qwest, Computer Associates, Global Crossing — and the sordid beat went on and on. Tyco Chief Executive Officer Dennis Kozlowski and others had used their companies to join the lifestyles of the rich and famous, throwing multimillion-dollar birthday parties, trading corporate jets and boats for bigger ones. With each passing "biggest ever" scandal came a bigger one.
Bernard Madoff, a former Nasdaq stock chairman and trusted by some of the wealthiest private investors in the United States, Europe, the Middle East and Asia, was turned in by his two sons in a $50 billion swindle, the largest in Wall Street history. Shock waves reverberated through country clubs from Palm Beach to the Hamptons, as well as in private banks in Switzerland and Monte Carlo.
Madoff was producing yearly returns of between 8 percent and 10 percent, year in and year out, irrespective of market downturns. It was a gigantic Ponzi scheme that he personally ran on a different skyscraper floor from the one used by his two sons, Andrew and Mark, who have worked for their father for two decades. He ran his operation separately from the one managed by his two sons. The sons showed up at his apartment to ask questions about the company's solvency. Madoff then conceded he was "finished" and that "it's all one big lie."
Named after the swindler emeritus Charles Ponzi, a Ponzi scheme is an investment operation that pays abnormally high returns to investors out of money paid in by subsequent investors, rather than from real profits generated by share trading.
Madoff, 70, managed to keep the swindle going for years by drawing in more and more wealthy people on the strength of his social contacts. Charged with a single count of securities fraud, he was released on $10 million bail. He faces up to 20 years in jail.
The bandit capitalism engendered since the end of the Cold War led inexorably to the subprime mortgage scandal that wound its way around the globe before the powers that be at the Fed and the Treasury Department realized this was the big enchilada that brought the United States to its financial knees — Lehman belly up; J.P. Morgan swallowed Bear Stearns; AIG saved by the government (i.e., the taxpayer) to the tune of $150 billion; Merrill saved by Bank of America; Fannie Mae and Freddie Mac saved by the government in what was tantamount to nationalization at an estimated cost of $200 billion. Thus, some $2 trillion was shoveled out by Treasury to save financial institutions that had been managed by CEOs making tens of millions a year.
The mighty Citigroup, hit by huge subprime losses, decided to shed 75,000 jobs and qualify for a government bailout.
But we're only halfway through the carnage, according to a CBS "60 Minutes" exclusive on the next humongous mortgage bubble yet to burst. This second wave of mortgages is known as "Alt-A" and "Option ARMS," somewhat better risks than subprime, but 8 million homes are still expected to be foreclosed during 2009-2011. These mortgages originally were offered at teaser rates as low as 1 percent, and experts are watching how the monthly payments are being reset so that $850 suddenly becomes $1,500. More than $1 trillion worth of these mortgages are scheduled to be reset at a much higher rate beginning next month.
Hundreds of thousands did not expect to be laid off without resources when they signed their mortgages. Most of them won't be able to meet monthly payments of $1,500. The government will have to step in again to make sure millions more don't go homeless.
A loophole in government bailouts also will have to be closed. It allows executive compensation packages to dodge government scrutiny in firms that don't benefit from the mint's printing presses.
As long as hedge funds and derivatives are protected against transparency, greed in the 21st century will continue to stampede democratic capitalism. This could be America's last wake-up call before a repeat of the Great Depression.