With mainstream media pounding impending doom into our minds every night in regards to the economy, it’s not a leap to imagine their might be a more complex and underlying view of what is really going on. The sub-prime mess is all over every news show at this point and is almost unavoidable if you’re reading the financial section of the newspapers.

A year ago, The Business Shrink, Peter Morris authored an article warning of the coming sub-prime crisis. The article was picked up by the L.A. Times syndicate, Peter was invited on CNN and on CNBC. Long Island Newsday also reproduced the article. If you’re looking to have the smokescreen removed from your view and actually understand what is going on with our economy and the whole sub-prime mess, this candid and blunt conversation is definitely for you.

Before you read this following conversation, we’ll introduce you to Peter Morris, The Business Shrink if you aren’t aware of his background already. It’s important to look at someones credentials and experience on the Internet these days, because just about anyone can spout their theories but not really have much to back it up. Peter Morris’s experience and credentials should let you see you can trust his credibility and insight. You can also access this information from the “About the Business Shrink” side button.

Peter Morris is The Business Shrink. Morris is a successful businessman who has multiple degrees from the School of Hard Knocks, along with an undergraduate degree from Princeton University in Public Affairs and East Asian Studies, and a law degree from Harvard Law School. Over the last thirty odd years of doing business worldwide, Morris has made and lost fortunes. He knows the systems.Today his primary work is as a real estate investor and as a financial adviser for funding and merger acquisition activities. He currently owns and controls real estate assets worldwide with a development value well in excess of $500 million. His other interests include investing in and establishing bio-tech and health care companies in conjunction with Harvard University and its affiliated hospitals.

If you would like to listen to the audio version of this interview, just click the play button on the yellow audio player available on this post. Without further ado, here is one of the best inside looks you will find on the current sub-prime crisis.

–Audio File Temporarily Unavailable–

Peter: Basically, this is one of the biggest rip offs in the history of financial world that’s going on right now. To put it into perspective, you have the big boys, for a moment we’ll call them the money center banks, like Citibank, the hedge-funds, the private equity funds and other major banks around the world and the government is looking the other way along with the regulators and rating agencies. And you know they’re writing down billions now and crying about it and of course they’re setting themselves up to take profits over the next few years because they are exaggerating to some extent. But even where they’re not they stole, or I should say finagled, trillions, trillions and trillions out of the markets by rolling these so called sub-primes into squishy derivatives that are like packages of esoteric assets that are not susceptible to transparency or easy valuation, that are not understandable by the rating agencies that bolstered the income on the financial statements that got sold all over the world to unsuspecting fools who are greedy. They made trillion and trillions off of this, now the music stops and what do these jerks want to do? They want to cry poor, they wanna panic, they’re sitting on their money and we should ask people out there to guess how many trillions and trillions were made against the small number of write offs relatively speaking that sound large but are really small. All they’re doing is wringing out the system, so that they can just consolidate and rip-off a lot of smaller banks, entrepreneurs, developers and of course the little home-owners on the bottom of the pile of s**t and that’s what is really going on.

Joel: So all the guys at the top will still be ok?

Peter: They are absolutely still ok, if you measure what Wallstreet and all these firms made over the last 7 years of bull run, by humping this Sub-prime paper, packaging it into derivatives with other speculative instruments that are highly leveraged they made trillions in earnings and in balance sheet. Now they’re giving up what appears to be a lot of money with big write offs setting themselves up for future income, crying the blues, asking for a handout with more money, central banker help, low interest rates when in fact if you really measure what the write offs are in relations to the profit taking it’s small, it’s a pittance. We don’t have a lack of liquidity, we have a confidence crisis and a lot of this by the greed of the lenders and the big boys who financed their balance sheet and sold esoteric goofy paper, woke up to realize that they can’t deal with each other because if they were that untrustworthy and slippery so are the other guys, so all of the sudden they stop passing money back and forth. They’re all sitting on it and it’s there, the guys that are getting riped off are the investors in the stock market, the homeowners, the consumers and these guys are going to get richer.

Joel: So you say there is not a liquidity crisis it’s confidence. Is it basically what we ran into when everyone ran on Northern Bank and freaked out and it really wasn’t a crisis, it was just because people were panicked?

Peter: Yes, and this is about psychology and money because people are shadowboxing and psyching each other out and the big guys are benefiting from this, even though they are taking big write offs. The fact of the matter is there is a lot of money in the world, it is just not moving right now, it’s staying in the hands of the people that have it and control it and they’re watching a lot of asset base shrink based on perception and some bad underwriting, but the underwriting and the write downs are small compared to the profits that were made in the balance sheet increases that were experienced over the last 7 to 10 years.We should invite our readers to guess what fraction is really being written off because it’s not a large one and let them stop and think and not just believe everything they read. Panicking just plays into the hands of the big boys. What happened to Citibank? They cry wolf, they write off $50 billion and they go to the Kuwaiti’s for $10 billion, the Chinese for $10 billion and all of these sovereign funds who need to prop up our economy because we’re still the biggest one in the world. In the meantime, they’ve written things down so they are prepared to make a lot of earnings again soon and the write offs aren’t nearly as large as the profits they took when they were marking things up unrealistically.The rating agencies didn’t understand what the hell they were looking at, instead of saying hey this isn’t my job or I don’t understand this or I’m not going to rate this, they just bent over and gave them triple A ratings half the time.

Joel: If it’s still sub-prime, if this is still what the issue is, isn’t there other things that are becoming important or did this all stem from the sub-prime crisis.

Peter: Well sub-prime is what let the cat out of the bag so to speak, but the sub-prime is sliced and diced into many little pieces, atomized, and sold all over the world, then packaged into portfolios of other hankie assets that travel under the generic name of derivative that were not subject to a hardcore valuation. They are like mathematical formulations of tertiary interest in assets that are soft in their own right. It’s not like gold, not like a house, not like a piece of land. It’s very arbitrary.

Joel: So then basically the sub-prime people invested in it whether through corporations or personally and it’s hurting everything else then?

Peter: Yeah, but look at it this way. The sub-prime market is falling because they put people into housing they couldn’t afford by writing mortgages that were created that often had no debt service for a number of years and the values of the housing were pumped up by the availability of cheap money and people did not have the income or the asset cushion to support it and it down-turned. So now, we have the dual downturn of the housing market crashing, then you have the mortgage market crashing, then you’ve got the securities market that brought the interest into the mortgages and chopped them up into millions of pieces, having indigestion and it’s like a virus and it spread to other financial assets, options, hedges all kinds of crazy stuff that was hard to value that were wrapped up into pretty packages of which sub-prime was in, but not the only thing. Then they sold off interest, they held interest on their balance sheet and then it became like a dumping ground to pretty up your balance sheet without having the scrutiny of the rating agencies who didn’t understand the nature of the complex paper of which sub-prime is just part.Then, when the s**t hit the fan, nobody wanted to lend any other bank money because they figured well if I have this bulls**t on my statement, they must have some on theirs, so I don’t wanna do it, I’m not secure. So money stops circulating, it doesn’t mean there’s no liquidity, no cash it just means it’s not moving around. That then cuts down banks lending to banks, banks lending to businesses, banks lending to consumers and consumers losing their equity at the same time, it’s like an echo effect, losing their equity in their homes which were propped up by easy money. The easy money is collapsing because at some point they turned into higher interest rates because the interest packs evaporated and the rates go up. So you have a classic case of a compound fracture to the consumer, as well as to the business that was perpetuated in the first place by WallStreet and the Hedge Funds and the financial engineers who just LOVE this paper. They would give them to people that couldn’t afford them.

Joel: How do we see things changing with the Fed dropping the rate?

Peter: Well, the problem is it’s A: to little to late and B: It’s like a buckshot it misses the mark. People are not shopping for lower cost of money, people are looking for more available of money, money that’s willing to take some measure of business risk and then lend to consumers and businesses and some of this is no longer rate sensitive it’s transaction sensitive. It’s like wait, I just don’t want to lend this bank money so they can lend to their customers because I don’t trust it’s balance sheet because they have 3 dogs and cats on it, like we have on ours and we don’t know when the next shoe is going to drop.So what is probably more important than to keep dropping rates, is the government who allowed some of this to happen through under-regulation, I’m not suggesting over-regulation, but they should be developing an emergency insurance corporation that insures interbank loans and certain loans to industry and consumers on some kind of a reinsurance basis to stabilize the risk issue, which right now is a crisis in confidence, not a lack of money.This was allowed to go so long and so far and compound it’s fracture from business to business and business to consumer to the point where it’s going to take a while to settle down. But they should be addressing the gating issue of people that have money not investing and not making loans period to businesses, banks or consumers. So it’s not just a cost of money issue.

Joel: In terms of that everyone is afraid… you say it’s not a liquidity crisis and a lot of people are panicking and that’s really the issue, why don’t we see gold going up. Normally, whenever confidence is dropped in the rest of the market then gold goes up. It seems that gold is dropping again. It’s definitely at higher levels…(note: at the time of this interview Gold was dropping quite a bit, however, it is back over $920 an ounce now)

Peter: Well that’s your answer. Gold used to be at $200 an ounce and it’s now pushing $1,000. It gets to the point of diminishing returns. You have the same thing with oil, oil got so high so it’s going down but it’s not going down to it’s historic levels.While I’m all in favor of the 1st amendment, the media has it’s problems, the media is so sensationalist and their helping to talk everyone out of the tree here right now. Who is the media owned by? Guys like Rupert Murdoch who are worth billions and billions and have financial interest in some of these major global institutions.I don’t want to be so complex, people don’t understand it but I don’t want to be so simple minded that we miss everything. But I just think that there is a lot of optical illusion going on here. If you read that poem from my brilliant friend and tone down the language, put some dashes where the words are so they are implied, he tells the story on his own about it from the English perspective and it’s the same stuff going on.

Here is the poem Peter is referring to:

A seasonal sonnet:”C**t of a Q4″By: David Cawthorne
Christmas cards and festive farce?
Stick it up your f***ing arse
Am I really expected to smile in spite
Of the fact the economy’s turned to shite?
The Dollar’s about to break the bank
Thanks to intellectually sub prime f***ing yanks
As for Blighty - what’s to say?
The Brit’s like to save for a rainy day
Safe in the knowledge that their Sterling’s secure
Banked so their future is certain and sure
Unless they had stashed it with Northern Rock
Then asked for it back to be told suck my ****
Still worse were the ones who believed the TV
And thought property developer should top their CV
Encouraged by lenders who screamed Buy to Let
Potential tycoons racked up squillions in debt
Like lambs to the slaughter drove after drove
From the far North of Scotland to Brighton and Hove
A cert’ – a no brainer – they’d seen it on telly
Property Ladder? They’d give it some welly
But as soon as the nation had racked up its gearing
Lenders and banks feared the course they were steering
With the proles in command of so much of the cash
Economic advisers soon predicted a crash
They could blame it on oil or the global economy
And remove from the masses their financial autonomy
One can’t trust the public with the wealth of the nation
Have the shell suited **** all forgotten their station?
Such matters are entrusted to our governments and bankers
But while their suits may be smarter they’re still all just wankers!

Peter: It’s the matter of the people that have the biggest amount of money, that control the biggest amount of money are doing the least to calm the nerves of the little people. Which eventually catches up with everybody doesn’t it? Challenge people, yeah that’s terrible about Citibank and Morgan Stanley and Lehman needing sovereign funds from countries we used to think were terrible to give us money and now they’re coming in to save us… but don’t feel sorry for these guys because the write-offs their taking are a pittance in relation to the trillions they made collectively over the last several years. People are not focused on that are they?

Joel: No they’re not, people are just focused on fear right now, that’s what they’re focused on. One thing I read just recently and it’s kind of a hair brained theory, but China is very excited that this is going on because now they can invest heavily in our stock markets and our country freely because they have stockpiles of money compared to us. Is this more sinister?

Peter: Well, I think that China is happy and a lot of the world is happy because they can buy things on the cheap in America, because we’re still the biggest economy in the world and we’re the safest place even if it’s by default. I think there are some real issues there. Do I think that they’re going to want to take us over? I don’t think so because we are militarily stronger and we can pass the same crappy laws that they do to nationalize things and mess them up. So at the end of the day, I don’t think that’s the end of the world.I think the real issue is we have made such a mess of ourselves over here. Typical of the Bush administration with oil, now the big scandal is money. First it was oil and now it’s money. All of the powerful people at the top of society are playing grab ass with money right now. The Administration is a lame duck on the way out.Yes, sub-prime is real, but not nearly as terrible as it’s being played up to be nor is it just sub-prime, it’s the derivatives and all those other hankie instruments that the rating agencies look the other way and never rated and never analyzed. So the government should step up with an insurance concept that lubricates the markets and allows banks to lend money again. Right now, they’re all pigged out, they all have a hand, they’re playing liars poker and nobody wants to lend money to each other and that’s hurting. Just call it a man-made liquidity crisis.

Joel: It really is very confusing, we’ve known about sub-prime for a really long time and all of the sudden, the s**t hit the fan and everyone is freaking out and people are talking about how they’re looking at the December 2007 sales and saying that the whole economy stalled then and that was when we hit the recession because everyone was losing, even places like Wal-Mart and Target, those places weren’t making their profits. So, is it really that it comes down to sub-prime and it’s messing everything else up?

Peter: And I’m saying that is just a deflection, that’s bulls**t. Sub-prime is now shorthand for Wallstreet and the money center banks and the hedge funds and all their buddies over eating and ripping off each other and the consumers with bogus financial instruments, part of which were the sub-prime mortgages but it’s a lot deeper than that.

Joel: That’s a really important point for everyone to learn. It’s not just this word, sub-prime, it gets a lot deeper than that, you say you don’t want to get too complex for readers and listeners, but I think it’s important because they’re not being fed any of that information from anyone else at least from a consumable point of view.

Peter: Yes, my goal is to stimulate a debate and get a lot of bright people and some not-so bright people to vote and to email us about their view of what’s really going on. We don’t want to sound like Oliver Stone and say that everything is a conspiracy, but we sure do want to say that there is a major misdirect going on when everything is blamed on the sub-prime.

Joel: So the big guys are holding onto their money out of fear that they could lose it in the market that’s very vulnerable?

Peter: Yes, they could lose it by lending it, which they normally do through other institutions, who then lend to the smaller people. It could get stuck in a halfway house from hell, where two days later the intermediate institutions that be announce a billion dollar write off, not just from sub-prime, but from derivatives and other types of instruments that are not easy to value. I keep coming back to that!This is worse than appraisal fraud. This is asset fraud. There is a lot of soft assets that were traveling in inflated arbitrary values that were never challenged by the government, the regulators or the ratings agency. Now, when the music has stopped, everybody has this so nobody wants to have sex with anybody else. Meaning no one knows who’s got a sexually transmitted disease, so nobody wants to have sex anymore. Then they found out that condoms don’t work. Condoms meaning reducing the rate.

Joel: So it’s how much money they took that they aren’t writing off? Meaning, they still have that money, they’re not writing it off?

Peter: Yeah, or they have distributed it in bonuses and partner distributions in the last few years. Come on! These guys have made fortunes.

Joel: So what kind of distributions did you say it was?

Peter: Bonuses and partnership distributions and salaries that Wallstreet and hedge funds have paid. Some of these hedge fund managers take out a billion dollars a year. The charter of their hedge funds say if your value of the portfolio increases X billion, you get 20%. You see, then they take the 20% in cash and then you find out that the X billions of increase was some guy finger-painting in the backroom with quantum physics on a bunch of instruments that are so unrelated to real assets their feet never touch the ground and when somebody sneezes these instruments get pneumonia and then they go south. But the guy that took a billion out for his bonus, what did he do with it? It’s sitting in treasuries or an emerging market somewhere.This needs to be looked at from a different angle quickly, so people can grab hold of what’s going on because this is now like a rolling stone that’s collecting a lot of momentum and unfortunately we’re talking ourselves down in the stock market, down in our consumer attitudes, down in our activities and into a deep recession and it is effecting the rest of the world and how they relate to it. It doesn’t have to go in that direction. I’m not saying that under any basis that we’re in great shape, but we’re not in the shape that we’re talking ourselves into.I am so fed up with reading this stuff every morning and watching people… pretty soon they’re going to be jumping out of buildings. The Federal Bank should get together and develop a global insurance corporation or reinsurance corporation that allows money to pass back and around to these institutions held harmless from write downs from crappy paper that they already sucked the juice out of in their profits, that they shouldn’t have on their statements anyway. I’m not feeling sorry them though because they have made a lot more than they’re writing down.Now that’s a compound statement that really summarizes it: Sub-prime is just a misdirect that’s beating the drums for the little man to scare him out of Wal-Mart and out of his house.

Joel: Well that little man needs Wal-Mart for a job now since they’ve all been shipped overseas.

Peter: I know but it’s so circular… Bernanke and all these guys need to get together in a room from all over the world and like I said, have a global reinsurance corporation so that the big guys can then lend each other money that in turn trickles down to the smaller companies and creates commerce again. It’s not about the dang interest rate.

Joel: That’s a big thing that they are throwing out to everybody trying to make them feel better and I don’t even know if people are buying it at this point…

Peter: They’re not buying it, look at the stock market!

Joel: Yeah, I agree.

Peter: If they were buying it, the markets around the world would be up by a lot right now, because that is a huge fractional drop. Huge! It’s like people were walking around and they were hit on the head and they have the proverbial chirping birds flying in circles around their head and they’re stumbling, scratching the back of their head and someone is telling them we’re going to give you an ice pack and they’re still walking around still feeling sh**ty and they don’t know why that makes them feel better.Yeah, and let me tell you, it was the oil rip off and now it’s the money rip off. The Bush’s have spawned a lot of self-dealing on a global basis. I’m not sure we want to be that crude about it and that political but let me tell you, it makes the oil cartel look like “Mary had a little lamb.”P.S. Oh yeah and how has this been helpful for your sex life?Hopefully now, your eyes are opened and you have a better insight to what the sub-prime mess is connected to. You can now see that the rabbit hole definitely does get deeper. But what do you think? What do you agree with or disagree with? Have you lost your home in foreclosure and want to blow off steam here? Feel free. We’d love to have all of your comments good or bad with the current crisis.Speak out and let your voice be heard, America needs to discuss the honest truth of this current recession threat. You can either leave your comments below or you can fill out our form here to apply to be on the radio show.