$100 Billion and Counting: How Wall Street Blew Itself up

The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts.

The proof that Wall Street is giving mainstream media a stage-managed version of what went wrong begins with a strange revelation by Gary Crittenden, CFO of Citigroup, on the November 5, 2007 conference call where he discusses what have now become the largest losses in the firm's 196-year history. Mr. Crittenden is asked by an analyst why the firm didn't hedge its risk. Here's his response:

"I mean I think it is a very fair question ... we are the largest player in this [collateralized debt obligation; CDO] business and given that we are the largest player in the business, reducing the book by half and then putting on what at the time was three times more hedges than we had ever had at least in our recent history, seemed to be very aggressive actions given that we were a major manufacturer of this product ... once this [decline in values] process started ... the size was simply not there. The market is simply not there to do it in size in any way and it would have been uneconomic to do it."

What Mr. Crittenden really seems to be saying is that Wall Street, with Citigroup leading the pack, built a vast market of complex securities but neglected to put in place a liquid and efficient marketplace for hedging this risk. Say, for example, big, liquid, exchange traded indices and futures contracts that are routinely used to hedge everything from stocks to soy beans to crude oil by as diverse a group as Iowa farmers to Saudi princes.

In fact, the unabridged story is breathtaking in its callous disregard for the economic well being of this nation and its people. Exchange traded products did not emerge to hedge this risk because, behind the scenes, Citigroup, along with 12 other big banks and securities firms were funding a private company to gobble up all the necessary components to keep this burgeoning cash cow to themselves in the opaque, unregulated, over-the-counter (OTC) market, despite the fact that they knew it was dysfunctional.

The private company that would become Wall Street's ticker tape for pricing exotic credit instruments (derivatives on subprime mortgages and credit default swaps) started out as Mark-it Partners in 2001, the brain child of Lance Uggla while he was working for a division of Toronto Dominion Bank, TD Securities.

The official story goes like this: Mark-it Partners needed big broker dealers to submit daily price data. As an incentive, it offered 13 large security dealers options to buy shares in the company providing they would be regular providers of pricing data: ABN AMRO, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Kleinwort Wasserstein, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, TD Securities, UBS. By 2004, according to an archived company press release, all of the companies had kicked in capital. The Financial Times would later report that these banks and brokerage firms held a majority interest of approximately 67%, hedge funds owned 13%, and employees 20%. The firm's web site currently says it has 16 banks as shareholders, without naming the banks.

Deutsche Bank, Goldman Sachs and JPMorgan were reportedly the first three firms to take an equity stake in Mark-it on or around August 29, 2003 when the three firms sold a proprietary database of credit derivative information to Mark-it. Since Mark-it is a private firm, financial terms have not been disclosed.