This is an online chat I recently had with my friend, Meletus. The article we are discussing is here.
Meletus: So when you say that people are "skimming the wealth", who are these people? I mean it looks like everybody is losing here.
Me: did you read the article I sent to our list asking everyone to read it and comment? this is how they are skimming money, I think, or at least one of the mechanisms.
Meletus: The Mechanism behind destroying the middle class?
Me: yes, bankrupting the US middle class
Meletus: haven't read it
Me: u should.
Meletus: I will...I do other things too during a typical day.
Me: if they really have created this crisis on purpose, which has always been my belief, then this article gives the most detailed explanation I have seen yet of one of the main mechanisms by which they *could* be doing it. The author even shows how they built plausible deniability into the scam.
Meletus: but wait. If they built this crisis on purpose, that means the current crisis is NOT directly caused by Peak Oil, as you said it was.
Me: what I've said was that it was *timed* to coincide with peak oil, because they knew the system was going to collapse at that time anyway. In other words, they knew that peak oil spells the end of industrial growth, and that when it hits, companies and individuals would start defaulting on their loans, go bankrupt, etc. People would no longer be needing credit, and the system would collapse. Knowing this was going to happen, they decided to pump the US middle class for all it was worth, timing it to just prior to the peak. Some analysts I know think they might have timed it a bit too early, but others say they timed it perfectly. Remember all this started in 2000, the subprime lending, the Credit default Swaps, described in the article, etc. It has long been predicted that global oil production would peak sometime between 2005 and 2010. That gave them a good amount of time to get everyone into as much debt as possible.
me: Here's the gist of the article: these packaged default swap things that the banks sold to individual investors had clauses in them saying that the investor will get a small one or two percent return on their investment UNLESS a certain number of these large financial institutions go bankrupt. If that happens, then the investor loses part or all of their original investment, and the bank gets to keep it. And the financial institutions listed in these contracts read like a list of the current ones which ARE going bankrupt. AIG, Lehman Brothers, etc. The contracts say that if so many of these go bankrupt, then you lose your money. So far the critical number has yet to go bankrupt, supposedly, but we are getting close. And supposedly the contracts were written such that a government bailout often still counts as a bankruptcy.
Me: So the author says that the banks who were issuing these contracts knew exactly which institutions were going to go bankrupt, that it was/is a scam, and that if just a few more go bankrupt, the tipping point will be reached and millions of individual investors will end up losing all their money to the banks. It would be the largest transfer of wealth from the middle class to the banks in all of history.
Meletus: you say "the banks" but all I hear and read about these days is that banks are in deep trouble.
Me: you need to read the article. Of course some banks will go under, but the big ones will make off like bandits. Also, its important to remember that the investment institutions that were listed in the contracts... like GM, or AIG, for example, were not all banks. They were any entity that had invested in these packaged mortgages. And supposedly the amount of money out there in these CDOs (Collaterized Debt Obligations) that were sold to individual middle class investors, is so much that it might end the banks' credit problems if they get to collect on them. So the only people who are going to get screwed are the individual investors who bought them under false pretenses. This is the premise of the article. I have always thought something like this was going on, yet I am not an expert, so I don't know if the article is correct. But if what the guy is saying is correct, then it explains at least one mechanism the banks are using to bankrupt the middle class.
Meletus: I'm not sure I understand it.
Me: well, these CDOs are complex. Basically they are bets that one investor makes against another that certain mortages will default. The article explains it better than I could.
Meletus: What middle class person buys CDOs?
Me: lots. they are disguesed to look like safe investments. that's the whole point. Every mortgage has a rating based on the borrowers financials, which determines the liklihood of default. But what they did was package these mortages into bundles of like 100 or so, and sell them with an "average" rating, or even a completely fraudulent rating, to disguise the bad apples. Investors bought them not realizing this. Supposedly there is obvious fraud involving these ratings agencies. I've heard some people say there should be prosecutions. There certainly are many lawsuits being filed by investors who have lost money.
Me: Here's the link again: http://www.businessspectator.com.au/bs.nsf/Article/A-tsunami-of-hope-or-terror-LHRJP?OpenDocument
Meletus: reading it now... how can you understand this shit?
Me: well, i've been reading a shitload of late about this stuff. it's all based on mortgages. keep reading, you will understand more towards the end.
Meletus: wtf is a credit default swap?
Me: it's something like a contract between a bank or owner of a mortgage, and an individual investor, betting on a package of mortgages, as to whether the debtors will default. if the debtors don't default (or a certain percentage of them), then the investor gets a one to two percent on the money they gave the bank. But if a critical number default, then the investor loses the money. the bank just keeps it. Something like that. And mortgages supposedly have ratings to help all the players know the risks, but these agencies were now rating these new kind of "mortgage bundles" (called "synthetic CDOs") that were not reflective of the actual risk.
Meletus: so people thought they were buying a low-risk, low-reward security, but actually were buying a high-risk, low-reward security instead.
Me: yeah, and and it didn't appear that high risk, because it was tied in with the survival of these large investment institutions, insurance giants, major corporations, etc. Who would have thought in 2007 that AIG or Lehman brothers would go bankrupt? And you would only really get screweed if a certain number of these major institutions went bankrupt. And then in 2008... presto! That is exactly what we are seeing. It's a giant scam, a fraud that is going to transfer massive amounts of wealth from individual investors to the banks.
Meletus: wait. screwed how? Imagine I am a customer wanting to buy these things...whatever the fuck they are called...CDOs. Say, I have $20,000 I want to invest. What exactly am I buying? I am buying a piece of hundreds of mortgages that have been bundled and graded according to some scale. AAA being the most safe, AA less, and so on. So, as long as these mortgages continue to be paid off, I make a share of the interest. But if some of them default, I lose part of my investment. But since it is rated AAA, I agree to buy them, thinking almost everyone will be able to make their mortgage payments and I'll collect some of the interest. Maybe some people will default and I won't make much or I might lose a little. But there's no way that a significant number of mortgages will default...because after all, it is AAA. So, I'm taking a small risk for a small reward.
Me: that sounds about right
Meletus: But now people are defaulting on mortgages left and right, and I didn't expect that to happen. So, I'm going to lose part of my investment. Maybe a significant part.
Me: maybe all of it. right.
Meletus: But now, what the FUCK do the failure of these institutions have to do with this?
Me: that's a good question. In the article, the author writes, "Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable." So what do these institutions have to do with the safety of the investment, either for the bank or for the invidvidual investor?
Meletus: you are saying that the fine print on these contracts say something to the effect of "Even if all the mortgages involved in your CDO continue to be paid off, if these institutions go bankrupt, you lose your entire investment."
Me: yeah, this gets very confusing. I think what is going on here is that these institutions are actually the ones *owning* the mortgages, also in package deals, but with slightly safer terms. The banks were investing *their* money, spreading out the risk. So even if some of the mortgages in a package default, these big investment companies were not losing huge amounts. The package of mortgages itself was still viable. And so *your* investment in it was still viable too. It was only when a huge number of mortgages started defaulting--such that it threatened the very solubility of the lending institution--that your fine print would kick in and you would lose major percentages of your investment, or all of it.
Meletus: but don't the people who originally borrowed the money still OWE it? For example, I have two mortgages. No doubt they were packaged and sold as a CDO. If I default on one or both of them, don't I still owe the fucking money? none of this makes any sense.
me: Sure you owe the money, but if you don't' have it, then the institution (or individual investor) who owns your mortgage owns something worthless. If they can sell your defaulted house and recoup the money, then fine. But if the prices of the house drops lower than the balance, then the remaining money is simply gone. It doesn't matter if it is still "owed." You cannot pay it.
Meletus: So they put a clause in the CDO contract saying if this happens, then we have the right to take the principle out of your investment.
Me: right. a percentage of your investment depending on how many of the institutions fail
Meletus: See, I can trick myself into thinking I understand now. But really I don't.
Me: For me, I feel that I understand what he is describing. I just don't know if all the details are true or not. I get the concepts, but have no idea as to whether its actually what is happening the way he describes. I know *something* like this is happening. I know this crisis was manufactured, and was not simply an accident resulting from greedy individual bankers wanting to make fees by selling more financial products. At the very least it was *allowed* to happen. For example, here is a wiki link to the Commodities Futures Modernization Act that the author mentions in the article. This was rammed through congress. It was no accident, and essentially removed government oversight from these new financial products. The FED was aware of all this. They let it happen at the very least.
http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000
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I also sent Mike Ruppert this article and asked him his opinion. Here is his response:
"This is only a part of a total $700 trillion derivatives bubble with all kinds of strange "instruments" which most of us haven't heard of. It's all extremely complex and no one I think, is capable of understanding every twist in the intestines of it.
"Stay with the big picture: the derivatives buble is busrting. I have little knowledge of CDOs. But I do know that they are derivatives. This guy has a small piece of the overall picture which I won't accept as a cause. A derivative is a derivative."
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