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mortgages and began lending more than 10 times their The industry had all the appearances of banks, but the underlying assets. hedge funds, equity funds and derivatives brokers had no After 9/11, George W. Bush told the nation to spend— _access to government loans in the event of a default. If the and during a time of war, that's what the nation did. Thee — owners defaulted, the hedge funds had no money to pay US government borrowed at unprecedented levels so as "from nothing". Those who had hedged on an asset going not only to pay for its "war on terror" in the Middle East up or down would not be able to collect on the winnings (calculated to cost $4 trillion) but or losses. also to pay for tax cuts at the The market had become the very time it should have The industry had all the largest industry in the world, and increased taxes. Bush removed all the financial giants were the reserve requirements in appearances of banks, but the cashing in: Bear Stearns, Fannie Mae and Freddie Mac Lehman Brothers, Citigroup and from 10 per cent to 2.5 per cent. hedge funds, equity funds AIG. Now they were free to lend even and derivatives brokers had But home-owners, long maxed more at bargain-basement out on their credit, were now interest rates, but only needed a no access to government loans beginning to default on their in the event of a default. fraction of reserves. Soon, banks were lending 30 times the asset value. all the debt amassed over the It was, as one economist put it, years for cars, credit card and an "orgy of excess". It was flagrant overspending during a _ student loans, medical payments and home equity loans. time of war. At no time in history has a nation gone into They had borrowed to pay for groceries and skyrocketing conflict without sacrifice, cutbacks, tax increases and _ health insurance premiums to keep up with their bigger economic conservation. houses and cars. They refinanced the debt they had for And there was a growing chance that, just like in 1929, lower rates that soon ballooned. The average American investors would rush to claim their money all at once. | owed 25 per cent of their annual income to credit card Therefore, to guarantee these high-risk mortgages, the debts alone. same financial houses that sold them then created In 2008, US housing prices began to slide precipitously "insurance policies" against the sub-prime investments downwards and mortgages were suddenly losing value. they were selling, marketed as Credit Default Swaps Manufacturing orders were down 4.5 per cent by (CDS). But the government must regulate insurance September, inventories began to pile up, unemployment policies, so by calling them CDS they remained totally was soaring and average house foreclosures had increased unregulated. by 121 per cent and up to 200 per cent in California. Financial institutions were "hedging their bets" and The financial giants had to stop trading these mortgage- selling premiums to protect the junk assets. In other backed securities, as now their losses would have to be words, the asset that should go up in value could also have __ visibly accounted for. a side-bet, just in case, that it might go down. By October Investors began withdrawing their funds. Bear Stearns, 2008, CDS were trading at $62 trillion, more than the value of the stock markets of the whole world combined. These bets had absolutely no value whatsoever and were not investments. They were just financial mortgages. Not only were they paying for their house but also instruments called "derivatives" —high-stakes a — gambling, "nothing from nothing" or, as (, MA Warren Buffett referred to them, "weapons of | FREE -maApRET financial mass destruction". The derivatives trade was "worth" more than one quadrillion \ dollars, or larger than the economy of the entire world. (In September 2008, the global gross domestic product was $60 trillion.) While in the 1990s the derivatives practice was challenged as being illegal, Greenspan legalised it. Soon, hedge funds became an entire industry, its managers betting on the derivatives market and gambling as much as they wanted. It was easy because it was money they did not have in the first place. \EConDM'ST. 5 omerenfl e The industry had all the appearances of banks, but the hedge funds, equity funds and derivatives brokers had FREE AARRET LEcontesT_ 5 omerviiffe NEXUS ¢ 25 no access to government loans in the event of a default. DECEMBER 2008 — JANUARY 2009 www.nexusmagazine.com