Wednesday, March 12, 2008

Crisis? You can bank on that!

My first job on leaving school was with the Commonwealth Bank as a trainee teller.

I’d gone out and bought my first bag-of-fruit, which sat uneasily on my skinny frame, and had my collar length Year 12 hair removed in a traditional short-back’n’sides.

My first job was going to get my hair cut for the second time in two days.

Who feels
The growing of the hair
And fears not the barber?

At least I got a haiku out of it.

The Bank was not for me. I quit six weeks later and headed back to school for another crack at Year 12.

That was a time when banks were bastions of conservatism.

They were conservative in their values and conservative in their use of our money.

At most they speculated on the likelihood of being able to foreclose on a mortgaged farm or motor vehicle (as we called cars then).

Bank funds and industrial profits attracted each other and had created finance capital, and finance capitalists, back in the mid-1800s. Marx had commented on this and on the emergence of joint stock companies as vehicles for stock market speculation in Capital.

By the early 1900s, Lenin had defined the merger of bank capital and industrial capital as one of the features of imperialism, a system of the continuing redivision of the world by great monopolies and the states behind them, into spheres of influence in which sources of raw materials and cheap labour were secured, and to which massive amounts of surplus capital, requiring deployment, were exported.

Lenin revealed how, in the separation of surplus capital and the finance capitalist from the process of production, a class essentially parasitic in nature had evolved such that the old industrial process of Money being exchanged for a Commodity which was exchanged for More Money became the new financial game of Money (pur)chasing Money (stocks, shares, bonds) for More Money.

The bubble of finance capital began to emerge like a skin sore on the broad back of industrial and bank capital. But unlike its progenitors, finance capital can reproduce its own value over and again at a much faster rate than capital invested in industrial production or agriculture, not having the requirement that such a large portion be tied up in fixed capital (plant, equipment, the built environs of large factories etc).

So the bubble kept growing, requiring a periodic pricking whenever its fantastic (as in “fantasy”) and speculative value got too far ahead of the real value of goods and commodities in circulation.

When US imperialism emerged relatively unscathed from the war against fascism and for the defence of the Soviet Union, it took over from British imperialism as the site of the largest concentrations of imperialist finance capital.

The growth of the parasite class continued with fresh vigour and with the support and the protection of the CIA and US imperialist military force.

By the early 1970s, the rate of accumulation of surplus capital from productive investment was in no position to match that coming from speculative and parasitic investment.

These days, the bubble is the body, and productive investment the little pricked pimple on its broad backside. For every dollar invested in productive activity, some 30 dollars now circulates in a mad frenzy as finance chases and chews on its own tail.

In addition to the periodic crises of the overproduction of goods, we now have periodic crises of the overproduction of finance capital, leading, as the cartoon (right) indicates, to a regular wiping out of credit.

Inventive new forms of parasitism have emerged in the last quarter of a century, requiring a language that did not exist 30 years ago. Naked shorting, leveraged buyouts, hedge funds, CDOs, private equities and so on.

And the banks, those bastions of conservatism of yesteryear, are having to fight for their very survival on a Gen Y battlefield.
As the very intelligent Adele Ferguson noted in the Weekend Australian (March 8-9, 2008): “Now banks make their money from taking risk and the more risk they take, the more money they make.”

Banks are even creating their own private equity investment arms to compete with the huge amounts of privately held capital that are circling the financial world like hungry sharks. Gotta be in it to win it!

This is not the place to explore every modern manifestation of finance parasitism, but one mentioned by Ferguson in her fine piece on the crisis facing Australian banks may serve to illustrate the nature of contemporary non-productive speculation. This is the collateralized debt obligation, or CDO.

Ferguson notes that “As a result of myriad synthetic debt transactions (known as collateralized debt obligations and credit default swaps), many hundreds of billions of dollars may change hands on the default of a relatively small number of companies.”

Let’s say a bank has a whole bunch of house mortgages, from which it can derive a long term cash flow, but it requires a more immediate cash injection so that it can invest in a project that offers a higher rate of return. It can actually sell those mortgages to another institution or maybe even a private investment fund, which then takes over the income stream generated by the mortgages. The bank sacrifices a slow but steady income stream for possibly a smaller amount of capital which is, however, immediately available to make money elsewhere.

However, the credit rating of the mortgages may not be all that high. Maybe they were based on loans made to people who were only working part-time, or casual, which means that they are not a good credit risk. So the bank might tie up these low-grade loans with some of better quality, or varying grades of better credit rating. And this parcel of debt might be structured in such a way that the whole of the value that it represents gets visited upon the poorest performing loans so that if there is a call on credit or a massive drop in share market values, such that 20% gets wiped off the value of the bottom layer of loans, and 10% of the middle layer, and 5% off the top layer, then effectively the combined loss of 35% is taken out of the value of the bottom layer, and the better security loans are left untouched. The only problem is that this collapse, if it spreads beyond the bottom layer, is then magnified many times faster at the upper levels.

In this graph from a Reserve bank paper entitled “Recent Developments in Collateralised Debt Obligations in Australia” (November 2007) we can see how a loss of 5% on the value of a single investment asset (bond) represents a 5% loss of its capital value (thin line at the bottom a 5 on the horizontal axis is also at 5 on the vertical axis. This is compared with a two-tier CDO with a layer of BBB-rated assets backed by a layer of underlying poorer performing assets. It is structured so that the first 5% of defaults are absorbed by the bottom layer, probably unrated; however the price of doing this is that a further 5% loss wipes out the entire BBB-rated layer. Given the structure of this CDO, as represented on the graph, a 5% loss of the value of this debt package has been absorbed by the lowest levels of debts (the sub-prime mortgages, for example) and the higher-rated investments (or debt purchases) denominated as BBB-rated have been left intact. They are still showing 0% losses on the vertical axis. They’ve been protected by the wiping out of our more numerous sub-primes or their equally shonky equivalents.

From the graph above, we can also see that once a collapse in debt values reaches into the BBB-rated tranche, or layer, then the speed of the wipeout is much greater than at the bond level. At the position of a 10% loss, the conventional investment suffers a loss of ten percent of value, but with its underlying portfolio gone, the middle value debts of the CDO collapse rapidly. If the losses on this portfolio were to rise from 5% to 7.5%, then the investor loses 50% of his/her/its investment. At the 10% point of loss (horizontal line) the BBB-rated debts are wiped out. That’s the end of any income from them, baby!

And that’s why the whole credit system is so shaky at the moment. Although the CDO market, as noted by the RBA, is relatively small at the moment, it is only one form of house-of-cards style parasitism which is sustaining the lifestyles of the super rich. And the roll-on effect is enormous. We are seeing the housing mortgage crisis spilling over to commercial real estate, and there is evidence that a collapse of consumer credit is on its way.

And get ready for a massive increase of local government rates. For, according to the RBA, “A large share of local governments have invested in CDOs, with data suggesting that recently, just over a third of NSW local governments had an investment in CDOs”.

But wait, there’s more!

In their blindness to the possible consequences of their own greed, the social parasites who add nothing to the productive life of society, having chased their own tail and started chewing on it, keep getting hungrier the more they chew, creating a black hole of collateralised debt obligation known as a CDO of CDOs, or a CDO squared. This time it is a three-layer structure of debt, with the BBB-rated tranche still protected by the underlying poor performers, but itself protecting debts with the highest possible AAA-rating. The maths of this is explained in the appendix to the RBA paper quoted above, available on the RBA website.

In brief, this is what happens, and it is shown in the accompanying graph. At 5% of losses, the conventional investor loses 5%. Neither the BBB-rated debts nor the higher value AAA-rated debts are touched. In the two-layer CDO, the rate of loss on the BBB-rated debts rises very quickly, as previously explained, and they are wiped out entirely at the stage of 10% of loss. The conventional investor loses 10% of investments. However, in the three-layer CDO (a CDO built on a CDO), losses greater than 5.65% wipe out all of the value vested in the poor performing and BBB-rated layers, and between 5.65% and 5.95%, the CDO investor loses all his/her/its investment.

As the RBA concludes: “In contrast, the investor who purchases the BBB tranche of the CDO issue has lost almost a fifth of his investment, while the investor in the untranched portfolio incurs losses of 5.95 per cent. Once they start to bear losses, losses for the CDO-squared investor occur at a faster pace than for the CDO investor who, in turn, experiences losses at a faster pace than the investor in the untranched portfolio of bonds.”

And meanwhile, you and I, the mugs who go to work and comprise the productive majority of the population, go about our lives blissfully unaware that such intensely parasitical pursuit of greed is consuming all the surplus value we create, and that the inventiveness of these parasites, over the last three decades, for all its cleverness, is simply hastening the day of the system’s inevitable collapse.
You can bank on it!

1 comment:

Anonymous said...

You say:
“And meanwhile, you and I, the mugs who go to work and comprise the productive majority of the population, go about our lives blissfully unaware that such intensely parasitical pursuit of greed is consuming all the surplus value we create,…”

What is meant here by ‘the productive majority” in a services based economy like Australia ?

Productive of surplus value/profits “WE” as mainly services workers create for capital ?

Or is this just labour for helping capital to realise surplus value as profit, but surplus value as material value ,created elsewhere.

Or ,is ita productive majority , in the sense of materially –physically – industrially productive labour ,producing material value ,some of which may be the “surplus product” value seized by capital ,the surplus value gained above the costs of wages raw materials outlaid etc.?

A surplus product that is then converted to cash as the source of all profits in the economy.

So then , What is the origin of all this suplus value/profit in this ‘services based

Economy “we” create ?

A very small minority of materially productive industrial workers?

It is a Marxist view that while services may be exchanged at their labour based value, new wealth is NOT created in the distribution/exchange of value.

That’s where non productive- of material value –parasites pursuing greed - tend to hang out, helping capital to realise its profits in return fo a cut.