Saturday, April 17, 2010

Recession Update: Tracking the Guilty

The spotlight is now shining on both the guilty of Wall Street and the guilty of official Washington.

Don’t have time to spend hours a day tracking the nefarious schemes by Wall Street and mortgage companies to defraud the American people? Need a quick way to decide whether the Democratic calls for financial system reform or the Republican calls for letting the rich get richer are the best way to build the country’s future? Try this money quote from Joe Nocera’s 4/17/10 New York Times article “A Wall Street Invention Let the Crisis Mutate” on for size:

At the peak [of the subprime mortgage crisis] there were well over $1 trillion in subprime and Alt-A mortgages that were securitized on Wall Street. That’s a lot, to be sure — but it was a finite number. You could have only as much exposure as there were bonds in existence.

The introduction of synthetic C.D.O.’s changed all that. Unlike a “normal” collateralized debt obligation, which contained the bonds themselves, the synthetic version contained credit-default swaps — derivatives that “referenced” a particular group of mortgage bonds. Once synthetic C.D.O.’s became popular, Wall Street no longer needed to feed the beast with new subprime loans. It could make an infinite number of bets on the bonds that already existed.

The people on the short side of those trades were truly savvy investors, who, unlike so many others, did their homework and had insights that made them a great deal of money. But the rise of synthetic C.D.O.’s that they pushed for — and their ability to use credit-default swaps to short subprime mortgage bonds — took an already bad situation and made it worse.

That should be enoughfor you to identify the bad guys and teach you that democracy is only as good as the integrity of the layers of government regulation. And there need to be layers – regulators to prevent commercial crime and regulators to prevent government crime. Today’s story is about commercial crime. The true story of how the U.S. Federal Government’s complicity aided and abetted this crime is only hinted at by remarks such as Senator Carl Levin’s 4/16/10 characterization of the years of toleration of Washington Mutual problems by the Federal regulatory body the Office of Thrift Supervision as “pitiful enforcement.”

It is hard for the government to regulate industry, especially when the ruling elite jumps effortlessly from one side to the other; it is even harder for it to regulate itself when official Washington essentially has only one party composed of two conservative wings. That old remark remains essentially true today, as the continuation of neo-con foreign policy with a human face and the recent consolidation of the principle of health care for profit rather than as a right both demonstrate. Nevertheless, glimmers of interest in reform are showing through the Washington dark, and the sudden willingness to countenance not only regulation of Wall Street but legal action against Wall Street and official condemnation of government failure are three encouraging examples.

No comments: