The Great Subprime “Babel”—A Modern Tale of Biblical Greed

By WilliamBanzai7

Wall Street never changes. The pockets change, the suckers change, the stocks change, but Wall Street never changes because human nature never changes. - Jesse Livermore

The public’s annual loss to Wall Street has usually been estimated in former years at $100,000,000 per annum, but owing to the more recent enterprising methods of the “Street” in manipulating the game, this estimate is now far to small as we shall see.-Franklin Keyes (1904)

Conceit of the Street

Shortly following the implosion of the great “dot.com” bubble, something happened that was to change the monetary affairs of all men on Earth.
The investment banking tribes had once again begun to proliferate and fill the Street. They spoke a new tongue--the tongue of quantitative engineering. It was a strange tongue with words like VAR, synthetic CDO, conduiting, CLO, SIV, bespoke swaps, CDOs squared, negative default correlations, binomial expansions and stochastic modeling. A tongue curiously reminiscent of the tongue of the late House of ENRON.

Generations of bankers before the “dot.com” bubble, were believers in the fundamental laws of securities valuation. They were believers in the book of Graham and Dodd. They toiled and worked hard to maintain their modest but prosperous existence.

The new generation of investment bankers was different. Theirs was a different code. Their game was a giant opaque pyramid of derivatives and mortgage backed securities. Had they confined themselves to this kind of financial life in a modest fashion, all might have been well. But the obscene income made possible by cheap leverage, financial engineering and securitization techniques made them ever greedier and in their hubris they thought they could beat the financial laws of thermodynamics.

They decided to build a great Tower of mortgage backed securities and derivatives. With this Tower they would pillage the housing markets and at the same time seemingly eliminate all risk for themselves. Heads we win, tails you lose; that was their credo. The symbol of their invincible wealth, as they thought, was to be built in the shadow of the House of Greenspan. It would be squeezed out of Joe Public who was long disdained and exploited by the Lords of the Wall Street kleptocracy. This time they would build tempt Average Joe with reckless mortgage loans supported by an “irrationally exuberant” real estate market.

According to the Lords of the Street, a new paradigm had emerged: financial risk could be sliced and diced into oblivion, cheap leverage is here to stay and housing prices will only go up. Many foresaw the folly of this enterprise. Buffet, the great chief of the House of Berkshire Hathaway, called the new instruments of invincible wealth, financial weapons of mass destruction. But the aging House of Greenspan was oblivious to the great folly unfolding before its jaundiced eye. The unbelievers were admonished to stay in Nebraska where they belonged.


Their Punishment

Finally, the Market decided to punish the arrogance of the bankers by destroying the Tower. First, it, confused them by splitting them up into many greedy tribes, each with a tongue and agenda of its own, (hence the name Babel, meaning “confusion”). A new tribe, the Shorts, arrived and the hunters soon became the hunted. Alas, they were forced to subjugate their vast troves of CDOs to the divine forces of the Market. This ultimate humiliation came to be known as the “great MTM slaughter.”

When this happened, the Tower had to be abandoned. The various bankers would migrate in different directions. Many were fired. Others thought they were headed to the three Byes, Dubai, Mumbai and Shanghai. Instead they wound up flipping burgers in Palookaville. Gone were the good old days of French furniture, French jets and $150 hamburgers.

The Tower itself was partly burned and partly swallowed by the remaining led by the House of JP Morgan. As for the Great Houses of Goldman and Morgan, they were forced to pledge bailout fealty to the Fed, under the wise and benevolent protection of Gentle Ben, the new master of the House of Greenspan. He who would later come to be known as the one and only “Father Moral Hazard”.