We got guns tucked in our waistlines with rags hangin' from our back pockets
Thugs. Bandanas hanging out of the back pocket was and is a part of gang culture, the color of the cloth signifying the particular gang.
Though he is rapping this entire verse in the present tense, Busta is is actually recalling his experience during the height of the drug game in New York in the late 1980s to early 1990s.
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