Two international banks’ role in the financial crisis formally enters the US Judicial System

(Daven Morrison) One of the most memorable events of the financial crisis was Rick Santelli’s passionate plea on the floor of the Chicago Mercantile Exchange. Early on in the crisis what came to be known as “Rick Santelli’s rant” was galvanizing to many.  Live on CNBC, Santelli placed the blame for the financial meltdown on the backs of “losers”. Observers note this began the rise of the tea party and at this point Santelli became the “father” of the movement. Santelli saw his moment as the best five minutes of his life and he summarily defined the problem as being “losers” who can’t afford to pay their mortgage.

With the problem simplified as “people buying their way into prosperity”, Santelli served as judge and jury for the crisis and asked those around him on the trading floor: “How many of you want to pay for your neighbor’s mortgage?”

Santelli tapped into a primitive aspect of human nature: scapegoating. Scapegoating presents many problems. First, scapegoating feels good so it is seldom questioned. Second, scapegoating appeals to raw emotion and energizes people. It is especially effective when a group feels victimized or powerless. And as the market was working it’s way through a crisis, there was a lot of pain. Lastly, and most importantly, scapegoating undermines understanding; it takes a distressed group of people who need to change and allows them an out.  Instead of seeing their role in the problem – and the financial markets played a central role, they could point the finger instead of the thumb and feel good that they were not to blame.  Effectively side-stepping any learning (which they needed to do) Santelli’s rant and those that followed his line of thinking assured those in the financial market place avoided doing any soul-searching.

Fortunately Rick Santelli is not a judge.

Denise L. Cote is a judge. And after a careful consideration of the facts, she has determined two banks: Nomura Holdings and The Royal Bank of Scotland (RBS), guilty of causing the financial crisis.  Why just a Scottish and a Japanese bank (where are the other banks)? The well-known banks took their lumps in the form of financial penalties ($18B) but they never had the audacity, i.e. the Santelli arrogance, to take their case to court and claim innocence. But these two banks did. RBS and Nomura took on the US Justice system effectively arguing: “It’s not us, your honor, it’s the losers who don’t pay their mortgage. And if you want to sue us, then bring it on!” 

The verdict changes the narrative. Now, the “losers” are the banks, and not the mortgage holders.  As I heard the story when it first began to unfold it struck me that the crisis was like a fire (the hot CDO market) that needed any form of fuel to keep burning – so any paper that could be created could be a mortgage. It didn’t matter whether or not it was legitimate, the essential factor was to feed the CDO burning engine.

As a psychiatrist I am not familiar with all the forces pushing and pulling a market. However I am very familiar with the power of a drug that causes physiological dependency. When a drug causes physiologic dependence the body’s healthy homeostasis gets thrown off. In other words, our bodies’ natural ability to keep things together gets out of whack. Normal signs to take care of fundamental needs such as eating, sleeping and of course using something in moderation, are ignored and the drug looms larger and larger in the dependent person’s mind. When this becomes addiction, the system is set off course by geometric orders of magnitude. For example, different from caffeine or sugar something addictive like cocaine, heroine or crystal meth, causes a person to do whatever it takes to get it.

Sadly, there is a tie to the traders of the Chicago CME. Here in Chicago today, in the wealthy conservative western suburb of Chicago where some of the traders live there is a terrible heroine epidemic. High school kids experimenting with pain-killers get hooked at pill parties. They then become easy prey for the dealers who want to get them addicted to the most pure forms of heroine. The dealers use a powerful dose of pure heroine. This transition is often lethal. Even if they survive the mega dose, the drug burns them still – permanently altering their quality of life.

An addicted Crazy Farmers’ Market:

Per Judge Cote’s decision, per the New York Times: Wall Street Banks were purchasing high-risk mortgages to bundle into bonds to be sold around the world. As these machines chugged along the quality dropped. It was the demand for mortgages that caused the failure, not “losers who didn’t pay their mortgages”.

Several of my clients had ties to the housing markets in the run up to the crisis. Many noted that the mortgages being written were unfair, scams, tricks on people who wanted to dream big and really didn’t understand how the process worked. These mortgages were the equivalent of the pain pills feeding the CDO insanity.

The CDO markets’ success unfortunately altered the mortgage process; with the addiction to a need for mortgages, the financial services industry (banking especially) became addicted to the product. As it unfolded the poor were scapegoated. But now, with Judge Cote’s actions, there is a new sheriff stepping into the Crazy Farmers’ Market. She has had the courage to enforce justice. Eight years later it also looks less like an engine bring through fuel and more like a drug abuser on a binge.

But the story isn’t over, the sheriff has more to do; despite this, no one senior executive has gone to jail.

How is that justice?

“It’s impossible for you to have been more wrong, Rick. Your call for inflation, the destruction of the dollar, the failure of the U.S. economy to rebound… The higher interest rates never came, the inability of the U.S. to sell bonds never happened, the dollar never crashed Rick, there isn’t a single one that’s worked for you.

“Every single bit of advice you gave would’ve lost people money.”

                  CNBC Reporter Steve Liesman to Rick Santelli Summer 2015

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