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Thursday: “I ripped their faces off”

Vegas, baby!

Vegas, baby!

According to Frank Partnoy, former derivatives dealer and now law professor, that’s what he and his buddies used to say after they sold some murky derivative to suckers like Orange County, CA and Proctor and Gamble.  Partnoy gave a fascinating interview with Terry Gross yesterday on Fresh Air and discussed the history of the derivatives market.  One of the prime movers and shakers of the deregulation racket was Wendy Gramm, wife of former Senator Phil Gramm.  Wendy worked for Bush Senior’s administration and after she left government in 1993, she went to work in the private sector.  Guess where she ended up.  Go on, you’ll never guess.  Ok, I’ll tell you.

She went to work for Enron.

You can’t make this stuff up, Folks.

Partnoy’s description of the mid-nineties derivatives market sounds an awful lot like Enron.  Imagine trading floors full of  the smartest guys in the room, gambling and speculating and existing on a pure adrenaline high.  It’s a place where Jack Welch style “rank and yank” performance evaluations hone the workforce down to its leanest and meanest predators.  They ripped people’s faces off because they were rewarded very well for doing it.  Unstoppable id.  Oh, and Partnoy says they were pigs to women too.  It almost makes me wonder if the obnoxious Obamaphiles who invaded DailyKos last year were sent there from some of these institutions.

Wall Street has a gambling addiction.  This is what Simon Johnson of Baseline Scenario has told us about bankers in Japan.  The bankers and brokers are poweless over their addiction but they are refusing to surrender to a higher power to restore sanity.  We know now that Geithner and Obama are enablers because they refuse to make the finance industry feel genuine pain.  And while the economists debate the details of the Geithner plan, the recipients of taxpayer largess are already making arrangements to go on another binge.  Naked Capitalism caught this nugget in the New York Post:

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post…

But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The secondary market represents a key cog in the mortgage market, and serves as a platform where mortgage originators can offload mortgages in bulk that have been converted into bonds.

Yields on such securities can be as high as 22 percent, one trader noted.

BofA said its purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market….

While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.

What the banks and other institutions like AIG need is an intervention and rehab.  Nationalization would have been a good place to start.  Unfortunately, we’re going to have several more years at the craps table instead.

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