THE REVOLVING DOOR

Across the world there’s a revolving-door between politics and finance through which high-ranking political retirees like Tony Blair move from government straight into banking, and high-flying bankers like John Key move unerringly into government.

In that world, governments have not only failed to protect their people from the predations of financiers, they’ve actually passed laws that enable financiers to lure people into a state of indebtedness off which they then feast.

In a spectacularly accurate piece of purple prose, Rolling Stone’s Matt Taibbi described Goldman Sachs, the world's most powerful investment bank, as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

To illustrate, the housing bubble was never about getting people into housing. Rather it was about neighbourhood banks and lenders acting as funnels for debts which were then packaged up with thousands of others and bought by investment banks like Goldman Sachs to either be sold again as mortgage-backed securities or held as reserves. Alternatively they could be used as collateral or gambled on via the purchase of credit default swaps (CDS).

On paper, every transaction generated more money. But it was all plaque; a gigantic fraud that makes the Nigerian scam look puny.

That became clear when New York-based bank Lehmann Brothers (the main competitor of Goldman Sachs) collapsed in 2008. Although Lehmann owed a shocking $65 billion when they collapsed, it turned out there was more than $400 billion worth of CDS being held by various speculators on just such a collapse happening.

The biggest holder, and therefore the biggest winner when Lehmann collapsed, was none other than Goldman Sachs. Conversely the biggest loser was a single insurer which was exposed to more than a quarter of those CDS: That was AIG, and it didn’t have a hope in hell of covering their exposure.

AIG had their back to wall, bankruptcy loomed, threatening to bring down the entire derivatives market, and with it the global banking system.

To forestall further collapses, the US Treasury and Federal Reserve bailed AIG out with more than $175 billion. In exchange, they took more than 80% ownership of the company. In short, all AIG’s losses fell on the backs of American taxpayers. Goldman Sachs, and other banking counterparties were paid 100 cents on the dollar. One single individual, John Paulson, received $8 Billion dollars.

The American government and these financiers have done an al-Qaeda on what was once the strongest economy in the world; they’ve flown it straight into the ground.

And yet nothing much has changed since 2008. Lenders are still luring borrowers into debt. Debt is still being bundled and on-sold to investment banks. Speculation continues. The only difference is that, now that housing is a bust, the lenders are using credit cards and student loans as the bait.

Here in New Zealand we’re seeing a similar pattern of financial collapses followed by taxpayer-funded government bailouts. Here too, credit cards and student loans are replacing home mortgages as the bait for borrowers to take on debt.

And here, as well as in America, the revolving door between politics and finance has never been busier.