From Battaglia Comunista 9/2007

In the USA it seems the perception of phenomena which give rise to the greatest fear is changing; terrorism, in all its guises, is being replaced to an ever greater extent by the fear of the so-called “sub primes”.

Truth be told, we were more familiar with other financial products that came to the fore some time back - junk bonds, swaps, options - to which now we can add the sub primes which possess the explicit quality of “burdening the workers with the costs of speculation” (G. Cusin, Il Manifesto 22-08-2007).

In the USA they talk more often about “Ninja loans”, where N.I.N.J.A. represents the acronym No Income, No Job, No Assets, to refer to loans granted to persons who fit the description. This could seem nonsensical, at least according to common sense, but perhaps that’s the best way to describe the ever more refined, perverse, cynical mechanisms, of which large-scale private monopoly capitalism makes use in its relentless search for deals, for profit. It makes one laugh a little to hear it being said, in reference to such transactions, that these loans bring a message of hope, of democracy, in so far as even those who can offer no security have been given the chance of acquiring a home, something which would be quite admirable if it weren’t for the fact by the very same mechanism, consumer credit, payments over time at interest, credit cards, one is granted the possibility of becoming indebted beyond one’s economic means in order to satisfy needs like a home, health, welfare, education which should be recognised as rights but instead are seen by “creative finance” as an opportunity to make profit. And it is in this specific sector where sub prime loans rushed in to the tune of around a hundred billion dollars.

But what are these sub prime loans, how are they structured, how do they work?

Essentially they are loans given to borrowers in the high-risk category, perhaps for their risky credit rating or their precarious employment, at higher rates of interest, around 15%. This, alongside the mortgage on the house purchased, guarantees the debt. It seems crazy. Those who have practically nothing have to pay the most!

The banking institutions who grant these types of loan pass them on to other banking institutions “specialists in the management of those products” who therefore take on board the relative risk at heavily discounted prices which is made possible by the high interest payments. Thus there are accumulated thousands of sub primes, which go on to form the portfolio of a company created just for this reason. They are then subdivided amongst various that give rise to a very unique “derivative” the so-called “sausage deeds” or, in technical jargon, “collateralised debt obligations” instruments of financial speculation in the pure state, a true game of chance, generously permitted by the financial authority and expanded immensely after the fall of the New Economy in 2001. In those “collateralised debt obligations” are included all sorts of credit: debts due to sub primes, credit card debt, car purchase, student loans. The same deeds are then given appropriate consecration by rating agencies like Merrill Lynch or Moody’s, whose valuation mean that the deeds can be priced higher. As far as the reliability of those agencies, best steer clear; in mid-August, for example, Merril Lynch advised, concerning Countrywide shares, the largest suppliers of loans in the USA, to sell, whilst scarcely two days previously, influenced by “dodgy” advice they had recommended to buy, all without the central ruling organs feeling any need to intervene.

To best understand how sub prime loans work, one needs to start from the fact that, as we know, the debt is guaranteed by the mortgage taken out on the purchased house and at a rate of interest which is on average high, at any rate, higher than normal.

That mechanism has been able to function so far, while the cost of money has been low and people have been able to get into debt and spend, thus contributing to the hike in the so-called construction boom due to new houses, increasing prices and large-scale deals in real-estate stock. The risk for the creditor was practically zero in as far as if the debtor honoured the terms, high rates of interest were guaranteed, but if not, the mortgage on the home provided the security. The company that takes over the sub primes at discounted prices finds in its turn the necessary capital to feed this whirling circuit of deals by issuing “guaranteed bonds on houses covered by loan”. These bonds, to be attractive and marketable have to promise a high rate of interest and are in fact literally swallowed by the investment funds, which, in their turn promise unusually high returns to their investors. Bear in mind that this frenzy of profiteering not only attracted the US investment funds but rather all those that operate on the international finance market.

But then when the Federal Reserve began to raise interest rates again, with obvious effects on the cost of money, the mechanism began to show ever more concerning signs of strain: the debtors begin to default because finding a job - and therefore a source of income - becomes ever more problematic whilst the American economy is characterised by a not too optimistic situation. Like falling dominos the effect immediately hits all the financial intermediaries which, where the debtor does not pay what is due on the loan, cannot sell the home, which guarantees the loan, at the price at which it had previously been valued. As a result, they have a crisis on their hands, whether it be because of the failure to pay interest on the loans which provided them with an income, or because the same loans are depreciated and this loss has to be passed on to their funds which:

they have in their portfolio but are no longer capable of paying up the normal requests for payback of earnings from the self-same funds.

G. Cusin, idem

This means that the American reality, where this sort of activity is rampant, is characterised by the colossal indebtedness of the State, society and families and this in turn shapes, giving us a very revealing perspective, contemporary dynamics and financial mechanisms. Now, when we come across jargon like “securitisation”, meaning the issuing of bonds to maintain private debt, or “hedge funds”, in other words, companies which make profit by managing risk, we have obvious proof that we are more than ever in the monopoly era, in the era where fictitious capital is created from fictitious capital and in which, at least in the western bastions, the world of production, of real wealth, is relegated to an ever more marginal role. Cases like the sub prime are not simple chance events, nor can they be considered at all natural, like lightning striking or flash floods, rather they express the most complete, most modern facet of monopoly capitalism and its legacy of exploitation, barbarism, misery and desolation.