News&Views 17:Dec 7

There has been no shortage of articles about the economic crisis, and as it has impacted the Debt Industry so significantly, we have been throwing our 2 cents (more like 2 basis points) into the fray for over a year now.  It's nice to have a venue to do so, and hopefully we have behaved in a responsible manner. Sadly, we still don't see a clear solution to our current economic problems (unemployment!) on the horizon, much less any clear and decisive leadership in dealing with the aftershocks that haven't hit us yet (National Debt!!!). What is clear is that there has been massive fraud perpetrated on the American public and it doesn't appear that much is being done about it. 

The Warning Signs

The fraud was as egregious as it was massive.  No one disputes that.  In fact, there were a plethora of red flags and loudly resounding alarms by a multitude of experts, about the housing bubble before it burst.  It was so apparent that in April 2001 and 2002 the Bush Administration warned repeatedly about the looming problem of Fannie Mae and Freddie Mac, and in 2003 it upgraded the problem as a severe "systemic risk" and tried to pass legislation to regulate the 2 giants.  That legislation was blocked by Democrats, with Barney Frank and Chuck Schumer insisting loudly that the institutions were sound. Later, in 2006, Senator McCain gave a speech on senate floor in an attempt to revive the legislation for regulation, but Republicans couldn't rally enough support.

As early as 2002 Warren Buffet called over-the-counter derivatives "financial weapons of mass destruction" and later referred to them as "phony instruments". The fraud perpetuated the notion that these derivatives were instruments too complex for most of us to understand, when, in fact, they were actually nothing more than "huge, illegal bets". In October of 2009 Frontline aired an expose about the intense behind the scenes attempts by Brooksley Born, Chairperson of the Commodity Futures Market from 1996 to 1999, to get derivatives regulated.  Born was not just ignored, she was muzzled by the financial power brokers of that time, former SEC Chairman Arthur Levitt, in concert with former Fed Chairman Alan Greenspan, former Treasury Secretary Robert Rubin and former Assistant Treasury Secretary Larry Summers.

Betrayal and Accountability

To say that the loosening of lending standards and leverage requirements that led to the crisis was a failure by many people at many levels, is a serious understatement.  From the  corporate greed of Banks, Insurance Companies and Wall Street, to the FDIC, the Fed, and Congress, it was a systematic breech of the public trust by the very people we rely on to set economic policy, to manage and to protect the financial welfare of the country. The deep injustice of the crisis, itself, is exacerbated by the fact that none of the parties that created the problem have been held accountable.  Since the peak of the crisis in late 2008, self interests have continued to be the driving force behind decisions during the aftermath of the crisis with the perpetrators of the fraud rewarded at public expense. There is an incestuous relationship, between the Banks and the Fed, and between Wall Street and Congress, wherein no one is interested in interrupting the cozy balance of power to do the right thing either for the tax payers, or for the future of the country. The denial continues even now; no one has been fired, no one has apologized and no one will step up to the plate and make the tough decisions that will stabilize our economy and get us back on track in the future.

Who do we blame? 

One would certainly think that there would be a growing sense of responsibility to the American people as you progress further up the line.  To be sure, among those at the top are the Fed and the FDIC, neither of which was more than tangentially responsible for the oversight of the root failures that led up to the crisis, and neither of which is charged with Consumer Protection in the failure areas.  The Fed directs monetary policy and is charged with maintaining the stability of our financial system. Its structure is comprised of numerous private banking institutions which help set bank regulation policy (for themselves). They are not subject to executive or legislative oversight by the government and, in effect, have no accountability to the American people. While the FDIC has some consumer protection functions with regard to the soundness of Banks and insuring deposits, its primary role is to step in after a banking crisis and manage the aftermath. 

The agency that is more directly linked to Consumer Protection in the areas of failure is the SEC, yet surprisingly, little blame has fallen on the SEC. Since its primary purpose is to regulate the stock market, prevent corporate abuses and protect the public from fraud, it would seem to us that there were many stages along the line that the SEC dropped the ball.  Where was the SEC as mortgages were packaged as financial instruments and sold on the stock market?  Where was the SEC when the derivatives evolved into instruments that incentivized irrational risks taking?  Where was the SEC when companies like Lehman Brothers engaged in questionable practices that cheated borrowers, and Goldman Sachs, Bear Stearns and Merrill Lynch all contributed in various ways to the creation of the subprime megascam by repackaging and selling bad loans that should have been written down?  During the S&L crisis, which was hardly a blip on the long term charts, there were 1100 criminal indictments. And so far, in this crisis, the criminals have been rewarded beyond their wildest dreams while the recovery leaves most of us behind.

In September 2008 John McCain called for the firing of Christopher Cox, SEC Chairman, for allowing "mismanagement and greed to become the operating standard", but Fed officials and Paulson protected his back.  Former SEC Chairman Harvey Pitt also defended Cox, blaming Congress for failing to modernize the regulatory system when it deregulated the financial services industry in the 1990s.  In May 2010 Janet Tavakoli, author and President of Tavakoli Structured Finance, Inc., spoke out and charged the SEC with incompetency during the escalation of the crisis by ignoring criminal behavior, specifically that of Goldman Sachs. She also accused the government of whitewashing the fraud and scams, claiming that Congress has been bought off by Wall Street. 

Incest

In addition, Tavakoli accused Goldman Sachs directly of accounting fraud and called for criminal indictments for fraudulent lending on a massive scale.  While the SEC had indeed filed charges in April against Goldman for mortgage fraud, with the Obama Administration heavily laden with Goldmanites (as was the previous Administration), and both parties recipients of substantial campaign donations, Tavakoli didn't expect the punishment to amount to much more than a traffic ticket.  In July a settlement was reached with Goldman paying $550 million for "negligence", not fraud, (the equivalent of 14 days of earnings). The largest SEC settlement ever, the SEC touted it as a victory, while Goldman stock immediately soared. With a market cap of $83 billion, and considering all the money they made off the "mistake", it appears that Tavakoli was correct.  It is sickeningly reminiscent of Hank Paulson granting Goldman 100 cents on the dollar for worthless securities that they had already hedged, when the going rate was 10 cents.

Don't let them Walk

Americans are trusting people who believe in happy endings.  As an optimist, I have to believe that the truth will come out, the crooks will be punished and our economy will recover fully enough for the baby boomer legacy to be one worthy of leaving our children and grand children.

But, one still has to ask, is Goldman Sachs the only source for government advisors? With a trend toward making Wall Street insiders government policy makers, aren't we naively running the risk of giving the power to people with mixed loyalties? And if at critical times they are all busy protecting each other, how can you ever have accountability?  

Other questions we should be asking ourselves are who devised the derivative schemes in the first place and shouldn't those that profited the most from dirty dealings pay restitution?  Why are we still listening to the Alan Greenspans, who got it wrong and then defended the status quo until the end?  And why are representatives who helped to create the housing debacle in the first place, then later obstructed corrective legislation, all the time insisting the entities were sound, still being reelected? Well intentioned or not, the consequences were disastrous and these same people are at the helm making bad decisions. Are we losing sight of how it happened, already?  Doesn't this send the message that shading dealings are acceptable and tax payer money is there for the taking?  If we can't rely on the SEC, and other consumer protection agencies, to put the American people first, who can we rely on? Unless you punish the culprits, what's to prevent it from happening all over again?