Three-Card Monte

For several decades, the financial players have had a wonderful time playing the game of Three Card Monte. Instead of having just three cards on a sidewalk stand or three walnuts and pea, they’ve had a half dozen regulators and literally a hundred countries to hide in.

Why else would the AIG Financial Products operation be set up in London, supervised by the US Office of Thrift Supervision, and write private insurance contracts called Credit Default Swaps on US mortgage bonds issued by unregulated non-bank finance companies owned by Wall Street brokerages? Lots of walnuts, just one pea (the risk), and literally dozens of street corners where the pea could be hiding, that’s why.


The proposed Consumer Financial Protection Agency would put a stop to the game of choosing the weakest regulator, and then hiding in some corner of the world that prizes financial secrecy. It would regulate activities, not institutions, and that would spoil the fun.

Imagine if we had regulated mortgage lending from a single authority, no matter who makes the loan? Perhaps the trigger to the meltdown, the subprime mortgage business and its evil derivative spawn (CDO and CDS) would not have turned into a threat to the entire world economy. After all, roughly 90% of the subprime mortgage bonds were issued by virtually unregulated entities controlled by Wall Street and a handful of “non-bank” finance companies like Ameriquest, New Century and Countrywide.

It’s time to put aside the foolishness that blames banks for the subprime meltdown, since the entire banking industry had only about 10% of the business. While we’re at it, forget blaming Fannie Mae and Freddie Mac, since they never guaranteed any subprime loans, and actually lost enormous market share to the “private label” Wall Street mortgage business in the crucial bubble years from 2003 – 2007.

I don’t care if you call yourself a bank, an insurance company, a mortgage bank, a Wall Street broker-dealer, or a marching band — if you make residential mortgage loans, those loans will be subject to the mortgage regulations and examination by the mortgage regulator.

If some hedge fund wants to claim they are really in East Timor and not Connecticut, then they should be able to make all the mortgage loans they want to Timoreans, secured by East Timor properties. If they want to lend to people in the US secured by houses in the US, they should be subject to US mortgage rules, period.

If you write insurance policies in any form with a US insured counterparty or customer like a bank or pension fund, then the US insurance regulators can look over your books. Calling yourself a “savings bank” and the insurance contract a “derivative CDS contract” under the Commodities and Futures Modernization Act with no disclosure, no regulation and even no reserve capital just doesn’t cut it. AIGFP proved that, and we’ll be paying for their cupidity (and their bonuses) for a couple of generations.

If you sell stocks and bonds to individuals, then the new consumer protection replacement for the SEC looks at your stock and bond operation. I imagine a few of Stanford’s “Antiguan CD” buyers wish our SEC had made sure those bonds he was selling were legit.

The current SEC is hopelessly compromised, given the professional career path every SEC employee hopes to follow. There is absolutely no personal professional future in protecting consumers from unbridled greed at financial institutions “regulated” by the SEC. If you make the wrong enemy in your five-figure job in SEC enforcement, how will you ever get the seven-figure job so many of your predecessors in that division of the SEC got in the past?

So now it’s easy to understand why a multi-million dollar propaganda campaign is cranking up to demonize the messenger, Barney Frank and the message, meaningful regulation.

The Three-card Monte players’ goal is to keep the regulators balkanized and distracted. That way they can preserve those cracks in the system that allowed short term profits to be created by virtually unregulated subsidiaries, offshore trusts, special purpose vehicles and private over-the-counter transactions. Why else would they want a super-committee with no power as their “solution?” Obviously if they can weaken even the existing regulators by setting up turf battles among them, the good times can roll, and then some.

Don’t be surprised to hear your own elected representatives spouting slogans like “keep consumer choice” or repeating unsupported conclusions about how it will make credit more expensive for all of us.

As if anything could be more expensive than several percentage points sucked out of our entire economy accounted as phantom bankster “profits”, paying very real bankster bonuses like an unregulated, uncapped tax on breathing. Credit is the lifeblood of capitalism, and the Vampire Class needs its pools of darkness to keep feeding on us.

Bear in mind that political contributions are the trump cards of politics, and your vote means squat to a Congressman faced with the chance to buy enough TV time to buy thousands of your neighbor’s votes, especially if all he has to do is resist the formation of a Consumer Financial Protection Agency. Besides, it’s proposed by a Congressman that millions love to hate, and it sounds like more Big Government. What could be easier?

The banksters are gathering in Washington, and they brought their checkbooks to buy the best (non)government they can afford.

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10 Responses to Three-Card Monte

  1. […] got some coffee left?  Go read my friend Howard Hill’s latest: on how regulators play Three-Card Monte which outs the career path of ‘captured […]

  2. e rheault says:

    At this point in time it really dont matter our economy is trashed kind of like elect the crook of your choise they are all thieves.

  3. hhill51 says:

    Why would we want to perpetuate a system that rewards the cops for protecting the thieves, or at least arranges that the cops don’t patrol the areas where the thieves are operating?

  4. IndianaJohn says:

    Our people,the voters will do nothing to change any of the games described above until they are hungry. Very hungry.

  5. Sam says:

    This author writes well about only one side of this issue. The problem is multi-facted. That’s why we’re doomed. Everyone is protecting their buddy (like Barney Frank in this case) while tossing well-desrved hand grenades across the river. Our problems are 100% moral.

  6. Jerry Haymaker says:

    I agree with this author. The sad part is that the system had to seriously crash for everyone to see that it does not work. Capitalism itself needs to be reworked to change this viscous type of greed and lust for power that pumps up the giant egos and vanity created by it.
    This brings us to a place we have been headed for a long time and shortened the time it took to get here. We will no longer have work for most people. Moving factory production out of the U.S. made home ownership above many working age persons income level. That is the real reason the bubble burst. Cheating speed it up along with other reasons like technological advances that eliminated good paying jobs.Widespread job creation will only come by massive increase of research and development.

  7. Vernon says:

    Interesting bit of revisionist history. Fannie and Freddie didn’t make sub prime loans? Then, those huge losses that caused them to have to be bailed out (nationalized) were all first rate, prime loans? All those storied about Congress putting political pressure on them to loan to “disadvantaged” lenders so that we could achieve the social nirvana of 100% home ownership were wrong? Gosh, how could I have been so gullible!

    • hhill51 says:

      I really can’t tell you how you could have been so gullible. Perhaps you have a political bias that makes you willing to believe assertions if the messenger shares your political stance.

      I can tell you that Fannie and Freddie had corporate charter restrictions that forced them to guarantee only 20% down, fully documented loans. That is probably the reason that Fannie and Freddie lost huge market share to the Street and a few large non-bank mortgage bond issuers like Ameriquest, GMAC/RFC, New Century and Countrywide.

      The subprime bonds mostly (about two thirds) came from Wall Street controlled and owned “conduits” that competed with the Agencies. You didn’t see those as household names, but they were huge. Use this link to see the twenty deals chosen as ABX index elements (constituents tab)…. Choose a deal – Series 6-2 might be a good one, because it was very near the peak of the subprime bond mania, consisting of deals issued in the first half of 2006.

      You’ll see wall street names you recognize, along with Street-owned names that you may not (eg SASC – Lehman conduit: RASC from GMAC’s RFC, Long Beach – a nonbank subsidiary of Wamu; CWABS – where the CW is Countrywide; Argent – wholesale division of Ameriquest; FFMLT from thrift First Franklin, bought by Merrill; ACE -owned by Deutsche Bank in a non-bank format; Soundview – a play on the office location of Greenwich Capital, now RBS; SAIL – another Lehman vehicle; GSAMP – the GS stands for Goldman Sachs and RAMP- another GMAC vehicle)

      The Agencies (Fannie and Freddie) were big customers, buying the top-rated AAA bonds off subprime deals. But issue the deals or make the mortgages? Nope.

      • Matt Wahrer says:

        Ahhhhhhhh- The LIGHT DAWNS!! I was fully prepared to lambaste you in the same political light as Vernon. MY GOD- The ‘internationalists’ really did place ‘money/profit pumps’ on Main Street to off shore holdings. The US citizen is truly the BIGGEST. SUCKER. EVER. Our off-shore controlled government is REALY, TRULY selling all the slaves (us) down the river. My God…THIS IS REAL!!!!!!!!

  8. […] most-read post on this blog, “Three-Card Monte,” addressed exactly the game being played out […]

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