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« Warren Buffett On Goldman Sachs And Apple | Main | Bill Cohan: Goldman Sachs Will Never Be Allowed To Fail »

Liz Warren And The Twin Towers Of Wall Street Mythology

Guest post by John Titus, writer and producer of Bailout.


Warren, Wall Street and Whine

Wall Street hates Warren's skill at unmasking its government agents and its government subsidies by cutting through the nonsense talk of people like Tim Geithner. Quite unwittingly, the hysterical screeds against Warren reveal much about the foundation of Wall Street's hubris.

One particularly snotty outburst over Warren, carried by New York Magazine, featured a pair of pretensions heard whenever Wall Street bankers try fobbing off their rigged casino looting operations as legitimate enterprise:

"Looking at her rhetoric on the campaign trail, she seems to take an exception to wealth creation and what banks do," said one bank executive. "It’s not really Wall Street she’s against — it’s banks, full stop," added another.

In this brief space, these brave, unnamed bank executives have set forth Wall Street's two favorite myths about itself: first, that its banks are just like manufacturers because they create wealth, and second, that they’re just like Main Street banks.

Both notions are objectively ridiculous.

First, Wall Street does not create wealth, nor can it.

There are three ways to create new capital: farming, mining, and manufacturing. That’s it.

In each case, the enterprise combines (say) $2 of labor and $2 of capital at the front end and out pops a $10 product at the back end. That’s true for the $10 corn bushel, the $10 copper ingot, the $10 hammer.

The output differs both in form and function from the inputs in each instance. The corn looks nothing like the seeds and dirt, the copper unlike the equipment and the mine, nor the hammer like its constituent materials.

Wall Street doesn't do anything like this. Banks, like law firms, shuffle paper. Their input, like their output, is simply 8 1/2 X 11 sheets of paper bearing ASCII characters, reams of it, yes, but nothing more. To the extent a $10 product springs forth from a pair of $2 notes, the $6 that the bankers have "created" is in reality a “fraud.”

This is not to say that banks and law firms can’t be useful, because they can. They can structure transactions and advise businesses so they’re more efficient, but that’s really about it. Litigation may produce a bonanza for a person or a particular company, but as a system it’s a zero-sum game because the money going into one pocket (after the significant takeout of rent, costs, fees, and salaries) comes from another.

Stated differently, banks are passive pursuits, unlike the active and transformative processes in manufacturing and farming. Banks match capital suppliers (investors) with its users (borrowers and entrepreneurs). That’s essentially what an IPO is. But the Facebook disaster, in which insiders provided fictitious revenue projections to the public so their buddies, armed with the real numbers, could make money shorting the dupes, revealed that Wall Street has fouled even this once venerable service.

If matching up suppliers and users sounds a lot what the water and gas companies do, you’ve put your finger on why the mega-banks are so eager to promote the myth that they are creators.

Utilities do not pay out 40% of revenues in salaries and bonuses. (Hell, takeout at the OTB--15% on winning bets and 20-25% on exotic bets like dime superfectas--is less than at the mega-banks.) Utilities do not pay out $140 billion in annual bonuses. And utilities do not crash the world economy by selling fraudulently inflated “products.

Wall Street did all three of those things.

Cue mega-bank myth #2: Wall Street banks are just like Main Street banks.

Despite what you heard if you listen to CNBC, the “great credit freeze” during the panic of late 2008 had nothing to do with Main Street. It stemmed instead from vastly overvalued residential mortgage products, which the mega-banks operating in that space could no longer use as collateral (not at anything close to par value, anyway).

This fact—that the 2008 credit freeze had nothing to do with Main Street banks and everything to do with ponzinomical Wall Street paper—is apparent from a research paper published by none other than the Federal Reserve. The researchers examined the three dominant claims in the media about the freeze and concluded that “all three claims are false.”

In arriving at their conclusion, the researchers compared Main Street (non-financial) commercial paper market with the Wall Street (financial) commercial paper market. They provided graph illustrating these two markets before and during well-known events during the collapse. Which paper market do you think imploded by 25% in a few days?

The numbers belie the media's breathless tales of Armageddon in the town square: the credit implosion of 2008 occurred exactly where the frauds occurred, specifically, in overvalued mortgage-backed securities. On Main Street, where the buyer-victims rather than the seller-perpetrators of fraudulent financial products do business, credit was fundamentally stable.

Main Street takes exception to the wealth destruction that mega-banks cause.  It’s not Wall Street wealth that people are against, it’s the fraud that siphons off that wealth from everyone else. Elizabeth Warren knows it.  So does Wall Street.


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Reader Comments (6)

How can any of you give any credence to this woman who masquerades as a native American for enrollment purposes, along with sympathy from liberal groups?
Dec 6, 2012 at 12:08 PM | Unregistered CommenterDave
Easy. I watch her shred Geithner to bits with questions about the bailout of AIG counterparties like Goldman Sachs and Deutsche Bank.

Why is it, do you suppose, that Republcan congressman can't seem to lay a glove on Wall Street apologists who provide absurd testimony?
Dec 6, 2012 at 12:27 PM | Unregistered CommenterCheyenne
Elizabeth Warren is going to scalp your children!
Dec 6, 2012 at 1:05 PM | Unregistered CommenterBenjamin
Anything from Grayson yet. This'll be fun.
Dec 6, 2012 at 3:12 PM | Unregistered CommenterSKINFLINT

Very good explanation-well done! As someone who has been an associate and partner in law firms for years, I understand and agree with your comparison of bankers and lawyers. Law firms (and I-banks) are about compensation for the partners/shareholders. That's it. Doing quality legal work (or selling crap paper or advice) just brings in the biz (you hope).

Most lay people don't get it, but it's simple. We don't make or sell a product; we serve our clients. There is nothing left to do at the end of the year (or quarter, actually), but to split up the profit after all the overhead is paid. Zero out the firm account. There is no reason to keep capital in the biz. To do what? Buy desks, computers and more space? That's pocket

Compensation. Compensation. Compensation. That's it. Ever wonder why Buffett never bought an I-bank until the GSuchs cushy and backed deal? Compensation.
Dec 6, 2012 at 3:50 PM | Unregistered CommenterJosie
I really don't give a damn if she is part Native American or not and I don't think anyone has solid legitimate proof she isn't.

Native American or not, I hope she goes on the warpath scalping and skinning large numbers of Wall Street Bank Parasites, paying particular attention to the big chief parasites.
Dec 6, 2012 at 5:21 PM | Unregistered CommenterSagebrush

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