Thursday, April 9, 2009

The Debt Mining Industry

Before today's post, a nod to regular readers "dink" and "Debra" who mentioned a Renaissance painting of a couple in fancy dress oblivious to the looming storm brewing behind them. Dink could not remember it and Debra could not immediately identify it, but I can.

The Tempest, oil on canvas by Giorgione, c. 1505 (Galleria dell’Accademia, Venice)

On with today's subject..


The mining industry is notorious for its terrible environmental record. Not only do mining operations pollute during the extraction period, runoff from tailings, open pits and dumps continues to do serious damage for decades after the mine is closed. In many cases the pollution will continue forever. Reclamation obligations are set out in the original pemitting process but they are often prefunctory and far from comprehensive enough to restore the environment to its original state.

But even so, some mining companies just take the valuable ores out and then declare bankruptcy, leaving behind a mess for the local communities to deal with. Needless to say, the owners and directors of the mining companies don't live "downstream" of their mess.

The same happened with the debt industry: the entire food chain that evolved around it - brokers, originators, packagers, servicing companies, lawyers, investment bankers, rating agencies, hedge funds, private equity firms - flourished mightily as the rich loan seams were mined to exhaustion. As the mine started drying up, new extraction methods were dreamed up and applied to a clueless population, to eke out potential interest streams and to stuff them into ever more opaque "vehicles". Regulators? C'mon... we're talking Bush administration here, with the de-regulation process having already started in the Clinton years by the likes of Greenspan (blinded by technology), Rubin (financial industry insider) and Summers (insufferable know-it-all wonderboy).

Liar loans, NINJAs, Alt-As, CLOs, junk bonds - a whole panoply of toxic debt was chopped up, mashed into amorphous chunks and fed into even more opaque CDOs, CPDOs, SIVs, synthetic CDOs.. Credit swaps were brought in and used like arsenic in gold mining: they made possible the extraction of "value" from even the poorest quality source rock, like sub-prime mortgages.

And then the debt mine finally went stone "dry" - as all resources ultimately do when they are squeezed mercilessly be they mines, oil wells or fisheries - leaving behind a whole lot of of aptly-named toxic waste to pollute the global village. But the vastly enriched mining company operators most definitely do not reside anywhere near the disaster zones they created, geographically, or income and wealth-wise.

The financial industry's bonus system of pay is (was, hopefully) based on immediate results and guaranteed that no care was taken to safeguard the future viability of the debt that was being mined. As an executive, I can tell you that the attitude in the business has always been "what have you done today". Heavy emphasis on today, quickly forgetting yesterday and entirely disregarding what effects our current actions may cause tommorrow.

It's no coincidence, then, that the last decade has produced income and wealth disparities not seen in the US since the robber baron era. The richest got ultra rich while everyone else remained stuck in the doldrums. According to the latest Survey of Consumer Finances (pdf file) conducted by the Federal Reserve, in 2007 the top 10% in the income percentile earned on average eight and a half times as much as the middle 40-60%: $400,000 annually versus only $47,000. By contrast in 1992 the top 10% earned five and a half times as much. The disparity has widened dramatically - and keep in mind that this is in constant 2007 dollars (see chart below, click to enlarge).
Income By Percentile

Likewise for wealth. Average net worth for the top 10% exploded upwards more than doubling to $4,000,000 while the "bottom" 90% went nowhere.

Net Worth by Percentile

Isn't it amazing? Nine out of ten American families, 90% of the population, is plainly in the relative "bottom". Literally, in the pits!

And here's the amazing part: because of what we are doing right now, i.e. saving the financial industry and the entire associated food chain from its own toxic waste, there is a real prospect that this "bottom" 90% of Americans will shoulder the vast portion of the salvage cost.

I say only "prospect" instead of "certainty" because things may and, indeed, should turn out differently. After banks are stabilized and markets thaw out (signs are there already) it is imperative that the Obama administration does the following:

a) Kill the shadow banking system - it's already withered, anyway. Start by once again distinguishing between regular banks and investment banks, i.e. re-imposing a modern version of the Glass-Steagall Act that was abolished by the Clinton administration. Strengthen the regulatory powers of all relevant public institutions (SEC, OCC, FRB, etc.).

b) Demand that shareholders and creditors assume the burden of keeping their financial companies afloat as public money is gradually withdrawn. This means capital injections in the form of new share issuance (i.e. likely dilution for existing shareholders) and accepting debt rollbacks/haircuts (i.e. losses for creditors). The objective is to reduce the legacy costs of the current Fed and Treasury operations to the taxpayer (i.e. the 90%) to the greatest extent possible.


  1. o.t. Dear Mr Hellasious
    Thank you for posting the painting, it reminded me of a wonderful trip to Venice.
    "Antidote de jour" so to say....
    Best BMH

  2. Well, a bit offtopic, but still - a perspective on ongoing processes nevertheless. So why not post it, even if not everybody will agree with it:

  3. Perhaps the increased wealth of the wealthy is phantom after all. Once the drop in the stock market is taken into account, the rich may not be as wealthy relative to the other 90%.

  4. @Anonymous:

    When the gains are privatized and the costs are socialized, it makes the problem worse, not better.

  5. @Hell re: The Tempest,

    Nice! That's absolutely the one! The storm clouds are nastier than I remember...

    Re: Mining,

    Its a nasty, destructive business. I knew a guy who went to U. of Montana. His summer job was was boating around an arsenic lake (created by mining co) to shoo birds away to keep the EPA happy. Ridiculous.

    Re: Analogy,

    Good metaphor. The mine is tapped and there won't be any more veins discovered.

  6. Does this mean we heading towards a new 'Gilded Age' for the rich, similar to that experienced after the 'Long Depression' of the 1870's?

  7. The mining metaphor is a good one.

    Another one I think is apt (for different reasons) is likening the financial industry to high efficiency pig farming where the pigs are fed the offal from the pork slaughterhouse.
    The food cycle gets twisted in on itself into a tight circle. And as less new food and energy is introduced into the system, and the circle gets tighter and tighter. The toxins in the system increase and increase until they overwhelm everything else and the entire enterprise devolves into a sickly mess.

    Funny how our financial system can be equated to some of the most disgusting industries ever conceived.

  8. Hey I heard a funny the other day:

    "WASHINGTON — Treasury Secretary Timothy Geithner picked a former Goldman Sachs lobbyist as a top aide Tuesday, the same day he announced rules aimed at reducing the role of lobbyists in agency decisions."

    And where is that "insufferable" Mr. Summers? Playing Jiminy Cricket to Obama's ear.

    The likelihood our Congress will look after the interests of the 60% rubes as opposed to the 10% moneyed supporters (you know, the ones that pay for their campaigns)? Maybe 10%?

    The bailout may be a "success" and become the go-to strategy for getting the financial system back on track. What the banks learn? Get too-big-to-fail and you can take bigger risks. After all what are the consequences to failure? Jeopardy for the shareholders and bondholders? Why argue with "success"?

    What's the Goldman Rule? The people from Goldman make the rules.

  9. Giorgione's painting is a recurring theme in one of my favorite novels--Mark Helprin's 'A Soldier of the Great War'

  10. Obama will do not do away with the shadow banking system because he is even more captured by the banking cabal, shadow and otherwise, than his horrid economic team.

    Obama is at least as captured by the banking system as the ignominious Larry S and Tim G because A.) he is an ignoramus about financial matters, and so can be easily bamboozled, and B.) because, long ago, Obama was bought and paid for- small contributions from sucker voters notwithstanding- by the banking industry.

    What's more, Obama does not have the personality to fight powerful interests, (quite the opposite, he bends to them) or even, much less, to take some risks. Over the long run, Mr Obama will likely prove to be what he has demonstrated himself to be during these first three months of his Presidency, a go along to get along spokesman in chief. Let's face it, the examples of Presidents as genuine reformers are very few, and at this point in our vitiated Republic's history, seemingly non-existent

    Obama, rhetoric aside, has allowed what transpired during the waning days of the odious Bush Administration to continue unabated, and so, we the people have been robbed to replenish a criminal banking establishments in a manner that Mussolini's Fascist big corporate/ government enablers and facilitators would have instantly recognized. We do it without threats or acts of violence, but otherwise there is little difference in the way that government conducts itself vis a vis the (shadow) banking industry.

    With all that in mind:

    Today was a particularly infamous day as Wells Fargo posted "record earnings." The only problem with their triumphant announcement is that they did not earn their "record" earnings. Their fraudulent winnings were appropriated by the not so invisible hand of our very own government from its seemingly somnambulant subjects. Pardon the purple prose.

    There are only two ways all this honking, toxic, world class king hell abomination of a financial system we have will be properly put down; It will either destroys itself once and for all, the people, in a violent manner will take it down, or perhaps outside forces, (think competitor nations) will deliver what amounts to a coup de grace. None of the above are, of course, mutually exclusive.

    With a slight addition, this post will be up at my site.

  11. These charts would tell a more accurate picture if income AFTER state and federal taxes were shown. Progressive taxation changes the picture somewhat. Although the financial world will undergo some changes I don't expect the President and Congress to "kill" shadow banking, and I don't expect them to approach anything in the ballpark of Glass-Steagall. The banksters have gotten what they wanted and I agree that banking will stabilize with some additional failures of not-too-big-to-fail types. Jobs and Housing will take a little more time and there will be pain yet. Of all the economic blogs I respect, Hell is the first to begin to express some optimism for the near term. I hope he is correct.

  12. I'm highly critical of any possibility of sudden recovery to begin with.
    As a result, I've taken to the gym and again after two years of lazy going - heck, so much to regain!, and gathered a bunch of pals to practice some krav maga tricks with. IMO, a nice little stash of preservable food can never hurt, either. Firearms? If you have any, give them away only out of your cold, dead hand :)

    About the FED etc, I've got some philosophical questions. While we can assume that many of the speculators were halfwits or too engaged in the process of getting rich to step aside and look (the crowd), the Fed (the white-collars) was supposed to be like a captain on the bridge - did they see no storm ahead, or chose to sail into one INTENTIONALLY? I simply refuse to believe all people of high standing and plentiful information were too stupid or too indoctrinated, eg, Greenspan. And if you choose to ride rough, then what is your plan, because public anger is not to be played with? I bet there is some deeper meaning to all this.

    As there is some identification going on already, I've got some pieces of music I've had bad luck identifying. There is this one which I can write down only as - hmmm: ta-ta-ta-tatata- - tatatataatata - taaa tat ta ta ta ta tata tatatataatata (French language, looping music in minor and quite catchy, womans voice (Birkin? Kaas?) and replace ta-tas with French lyrics). Pretty hard, me being quite a n00b in French and music :).

  13. Hmmmm.
    Good job on the Giorgione painting, Hell.
    Actually, Giorgione at least had floated into my head this morning, (along with a Titian painting).
    But THIS painting is incredible, isn't it ?
    He must have been one hell of a guy to paint that painting. If my memory is correct, he is responsible ofr other allegorical painting(s) that have never been elucidated. This one is pretty enigmatic.
    A touch of mystery in a world of...

    I take it back about toilet training.
    Actually, I think Hell's post is a pretty good illustration of something that has disturbed me for quite some time.
    I think that, as a species, we have short-circuited the DIGESTION process.
    I will be more explicit. We are collective aces at gobbling up, gobble, gobble, racking it IN, AND
    At shitting it OUT, AD NAUSEUM.
    We are probably the only species capable of fouling its nest to such a great extent.
    And we are insatiable (that's orality, in the body sense, now figuratively speaking, we could talk about sheer, unadulterated GREED which is also oral...).
    I have always felt uncomfortable about mining.
    It implies a dimension of... RAPE, VIOLATION of the earth.
    And I am not at all surprised that those involved in doing it suffer from, and perpetrate ALIENATION.
    So... should we be surprised at where MINING and GOLD have led us ?

    P.S. When you start talking to the middle class on an individual basis, you will invariably find that NOBODY, on a subjective basis, really considers himself/herself to be rich. Even those who are very very far from hurting do not think they are rich.
    Even if they really really ARE, my friends...
    But it all depends on who says it, and when. When you want to identify with the rich, and send a status message, then you consider youself RICH. But when you start talking about privileges, and CEO's and the whole thing, then obviously you're not.
    It's called the double standard...

  14. Homo Sarcasticus, my God, that is really really slim.
    I have NO idea. Maybe Hell will pull through ?
    He has a window on French culture.
    Or Arnould ? He's French, I'm sure...
    I don't listen to Patricia Kaas...

  15. Hell, can you post the SCF2007
    you downloaded ? See, the one they
    have _now_ available no longer contains the before-tax and net worth
    charts :-(

  16. scratch my previous
    pdf reader is junk!

  17. I think there is a lot of using statistics that only show what naturally happens in a credit society. Somehow all the fat cats got rich in the Bush administration while that somehow never happened before Bush? Look at your charts, as the amount went up 75% during Clinton and less than 30% during Bush. Guys like Sandy Weill, who hired Rubin after he did his dirty work were drawing $50 million plus the entire decade of the 1990's.

    There were a combination of processes that happened to lead us where we are. The Great Society and the Viet Nam war has as much to do with what happened as CDO's and CDS's, as they finished destroying the link to gold and the purely paper/collateral took over. Even paper has its limits in a credit society, which we are going to find out. There will be no stability, as we aren't doing anything different than Japan, which went to crap during a world inflation. The 1970's went haywire and we needed Reagans plan to leave more money to consume and invest. Government financed it. Then we had a bad credit crunch in the 1990 to 1992 period. Greenspan bailed us out, as rates had been kept so high that the S&L industry was broke before the crooks showed up. Greenspan and Rubin bailed out everything in the 1990's and we exited with the biggest major stock market bubble in history, the collapse of which should have taken the world into depression. Enter a new financial tool and a new bubble.

    Without knowing it in general, there has been a brewing real estate bubble for 4 decades. I believe economists have known for years that real estate bubbles float every ship, but when they are over they wipe out all in sight. The real estate bubble took off in the 1990's and it still persists today. 4.5 million preowned home sales is not a bust.

    What is seen as a bunch of big mistakes is really nothing but an end game credit bubble. There are a group of idiots that believe Obama is going to fix that and that Bush caused this. Bush had 2 options, have a long and major depression starting in 2000 or attempt to get through this. Obama is faced with the same problem, a busted bubble. The Nasdaq had lost 70% from top tick to bottom by March 2001, before Bush had done anything.

    The Clinton administration was met with 20% annual gains in the stock market every year from 1995 to 1999, 5 straight years. Seems the game had been done before Glass Stegal had been repealed. Was it Clintons fault? Not many politicians ever pull the punch bowl away when the party is buzzing and who knows if it was Clintons policies or if he was just there.

    I have been around the real estate and mortgage business for a long time. Somehow the press puts out that subprime mortgages were invented in 2001 or 2002. They have been around since about 1990, maybe a couple of years earlier. While in the mortgage business, I refused to originate them because I didn't like the terms. It is likely that a decline in interest rates made these terms attractive and the paper acceptable, as you could fix a subprime at near what prime was a couple of years earlier. I think this was no more a problem than consumer credit in general.

    In asset bubbles/credit bubbles, which are always end games of economic cycles, the people that hold the assets or get involved always make a lot of money. Stated inflation of 2.5% in the 1990's was met with 20% annual gains in the stock market for 5 years straight. 150% gains. The 2000's were really not much different than the late 1970's under Carter, except the interest rates were lower.

    The real truth is that bubbles are an end result of fractional reserve banking. It cannot seem to permeate the rock hard skulls of most that write about this stuff that 101% of 100% leaves something missing. From the base going forward, the difference is mathematically impossible to pay and eventually lending has to accellerate or the game collapses. It is a choice of dying now or next week. Instead of seeing the truth, most people would rather make a political argument while the bankers organize for the next cycle. Not one person has ever put $2 dollars in a jar and come back to find these dollars had a baby, but somehow they believe bankers can make this happen. As anti capitalist as this sounds, it really isn't. Something has to be done with the art of banking, something clearly recognized by our founding fathers or we will have these messes for the rest of mankind. Government regulation will never make 1.05 equal 1. Nor will saving money by lending it out ever make savings greater than debt.

  18. Eduardo hits on a good point. If any of you are watching and listening, the attempt is to resurrect the former system. You can't run a V-8 engine with a lawnmower carburator. In order to sustain the debt level and push the system forward, a credit mechanism in excess of what collapsed will have to be put in place. If the debt collapses, it wipes out the system we had in place, most likely worldwide.

    If he didn't know it the day he was elected, Obama knew by the day he was sworn in that the system that collapsed would be all that would get us out of this. What he doesn't know is that his policies are going to lead to total collapse. It is like standing up against a hurricane blowing 200 MPH instead of bunkering down.

    The problem with government is that it is usually in bed with banking. They didn't fix the banking in Japan because the bankers were more powerful than the Prime minister and there isn't any saving face in Japan. You just resign and get out. Here, you don't get out, you pretend it is okay. A man with no legs cannot walk and the banking industry supports goverment borrowing as well as other things financial. The solution is merely to load more weight on the system, which is why Japan never recovered.

    There needs to be a plan to let this collapse as fast as possible and keep the necessities moving. We need something to call money and a system of everyone, starting with the shareholders of banks taking their losses. Everything is relative so if everyone takes a 50% haircut, most of the purchasing power will still be there after the risk capital is wiped out. Everything will merely have a new owner, save the assets of people that stayed out of debt or didn't own anything.

  19. An excellent critique of American Culture!!



  20. Obama was trained at Harvard Law School to serve financial interests. As president of the law review, he was among those best trained.

  21. Very powerful analogy. Don't forget those miners who labor for peanuts, face health hazards while they do the companies' dirty work.

    In the financial industry, this food chain, could be described as co-conspirators.

    In the health care industry, it is a delousing of the increasing parasite burden that doctors, nurses and ultimately patients which is needed.

    A decreasing percentage of health care reimbursement goes to the doctors. Instead it has been diverted to shareholders, Health CEOs, lawyers, practice management courses, advisors fees, compliance with joint commission whims, medicare rules, etc.

    The bottom line, fewer and fewer people are doing useful work. The only gains in "productivity" have been gains in non-productiivty enterprises and other various forms of govt.

  22. Hell,

    You are a very bright guy and have done an enormous service in exposing the technical aspects of the crisis. But you are doing yourself - - I see that most of the readers here are not fooled by this - - an enormous disservice if you think that technical fixes can bring a modicum of stability to American society. The corruption is too deep and has gone on too long. Nothing less than profound social and moral (not religious) change can return us to a semblance of peace and civility. It will take many years and profound changes will occur. The time to begin talking about them is now.

    Best Regards

  23. Dear SS,

    Thanks for your input - but you misunderstand..

    If you believe that a transition from Permagrowth to Sustainability, as I have been advocating for years, is a mere "technical fix" then I'm afraid you are completely unaware with society's structure since at least a century ago.

    Start with a basic reading of Thermodynamics and we'll talk again..



  24. But SS, think a little bit about this fact :
    We have not had a significant war within European boundaries, a World War, since the end of the 1940's.
    That is TECHNICALLY called...PEACE.
    I'm not saying that this peace is lovely, but we are not at each other's throats with weapons.
    Maybe because we are projecting our agressiveness elsewhere on the planet ? I don't know.
    But saying that we don't have peace is false.
    I don't really think that we know what to do with our agressive impulses at this point in time.
    Perhaps what we are doing with our agressive impulses is worse than killing ? I don't know...
    But I did learn this from J.K. Rowling, who I kind of like, (I am not a literary snob, I read all kinds of stuff...), there are things out there that are worse than death... I think that that MAY be true.

  25. Deb,

    Always glad to have your insights. I was talking about the US when I mentioned the lack of peace, not Europe where they have learned several lessons from their two great wars. As to things worse than death, you need to have life first to appreciate them.

    I may reply to Hell later after thinking about it more. If he agrees with me that we need fundamental change than fine, if sustainable development will bring this about than we can start talking about what that implies.

    Thanks Everyone


  26. Hell, I just realized you said "I'm afraid you are completely unaware with society's structure since at least a century ago"

    I seem to remember a rather interesting figure who lived a century ago and was the first to mathematically write about social structure a century ago.

    Oddly, I suspect you are saying the same thing he observed.