Posted on September 20, 2008 - by Venik

The Day Capitalism Died

On December 26, 1991, the Supreme Soviet – USSR’s highest governmental body – recognized the collapse of the Soviet Union and dissolved itself. Some in the West viewed this day as the official date of their “victory” in the Cold War. By the same token, some Russians view September 18, 2008 as their, if not victory, then at least vindication. What Marx predicted over a century ago has finally happened: the US became a Socialist state with early signs of a planned economy.

Capitalism and free market economy in the US came to an abrupt end with the announcement by the US government of allocating at least $700 billion to nationalize a massive chunk of its lending and insurance industry, raising the government’s public debt to $11.3 trillion – more than double what it was in 2000. The $700-billion mortgage industry rescue package comes on top of the $200 billion to be spent of shoring up Fannie May and Freddie Mac and $85 billion to bail out AIG.

So who is the proud owner of all these “toxic” investments, these mortgage “products” that the movers and shakers of America’s lending industry have been selling and re-selling to each other, until the bubble finally burst? If you are one of the 138 million US taxpayers, congratulations – you’ve just bought about $8,000-worth of some of the worst investments in the history of your country. Congratulations to me too. I feel rich already.

If you listen to CNN’s financial experts (consisting primarily of newspaper reporters and this jolly bald character in a striped suit), the trillion-dollar (for starters) bailout deal for some of America’s top kleptocrats is – would you believe it – a blessing in disguise. People are ignorant, they say. People don’t understand, they say. We will “repackage” and resell these bad investments and we will make a profit, they say. How wonderful. It turns out that bad investments make you profit just like good investments. Apparently, there is no difference.

So what is the basis for this optimism? Well, some say, don’t be melodramatic: America has a long history of government bailouts for private businesses: the Panic of 1792, the Great Depression, and the 1986-1995 savings and loans crisis. In the latter example, the Congress set up the infamous Resolution Trust Corporation to buy out the bad loans of about 1,600 S&Ls that went under. RTC ended up with a variety of oddball assets put up as collateral on the loans and spent the next six years trying to recover whatever value it could from these assets. In the end, the RTC saga made zero profit and ended up costing US taxpayers some $124 billion in 1989 dollars.

“…the government ended up owning shopping centers, homes and resorts, along with an odd collection of assets put up as collateral for S&L loans, including Picasso and Warhol paintings, a 30-horse merry-go-round, a Colonial-era whiskey distillery, a drawstring made from Martha Washington’s gown and 800 units of semen from a registered Brahma bull.”

(Source: Government Bailouts: A U.S. Tradition Dating to Hamilton, by Michael M. Phillips, The Wall Street Journal, Sept. 20, 2008)

So the next time your Republican friend tells you that this latest bailout will turn a profit, ask him “when and how much” and watch him drown. At least in the RTC case we were dealing with “simple” loans and actual, physical collateral that could be auctioned off. Today we are dealing with…, well, nobody really knows what. Hundreds of billions of packaged and re-packaged loan “products” that the banks have been peddling for years, contributing to the phony growth of the US economy.

So exactly what assets do these failed financial institutions have, other than desks, chairs and pencils? Computer data centers. When the assets of bankrupt Lehman Brothers were sold last Tuesday to Barclays for $1.75 billion, its data center accounted for $1.5 billion of the company’s total value. And we all know how much a computer you bought today will be worth next year. Lehman Brothers, however, did not buy their computers yesterday or even last year. Those working in the IT industry know that the vast majority of computing infrastructure used by the banks consists of antiquated equipment – 10 or more years old – like ancient mainframes and VAX platforms, that most sysadmins under fifty are afraid to touch. Similarly, in the recent purchase of Bear Stearns by J.P. Morgan, much of former’s value came from its data centers that some dare to call “state of the art”.

Chances are, you just bought $8,000-worth of 1990s-era computer hardware sporting such brand names as “Digital” and “Auspex”, may their manufacturers rest in peace. Go to Dice.com or Monster.com and search for job ads seeking COBOL programmers and VAX or mainframe sysadmins and you will discover that most of these ads come from banking and insurance industries. This is not to say that banks don’t have some state-of-the-art computing assets. However, if you put up Lehman Brothers’ $1.5-billion-worth of computing infrastructure for sale on eBay, you’d be lucky to make half that much. And I am being extremely generous.

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