Debunking Wall Street's New Fairy Tale

You gotta give those guys credit: when it comes to dissembling, distorting, misleading, and otherwise playing games with the truth: no one else even comes close to the shady characters who ply their wares on Wall Street.

Otherwise, how else could you explain, as Brad Delong, publisher of the Grasping Reality with Both Hands blog, notes in a commentary for The Week, "A Wall Street Fairy Tale," the latest load of nonsense -- aside from assertions that there are green shoots sprouting throughout the economy and that stocks are "cheap" -- that the financial system -- which has been bailed out with trillions of dollars of ultra-cheap loans and undeserved subsidies -- was never really in all that much trouble to begin with?

Now that the danger appears to have passed, Wall Street honchos, with support from some in Congress, are telling themselves that the financial system was perfectly sound all along. We can’t afford their delusion.

The story we tell ourselves about what happened to the financial markets last fall is vitally important. It will determine what form financial market regulation takes in the next few decades, and how vulnerable we will be to the next disruption. At this moment, a relatively calm one, a fictional version of last fall's events is gaining traction. So let's review a few foundational facts.

September, 2008 was a busy month. On Sunday, the 7th, the U.S. government nationalized the two large government-sponsored mortgage enterprises, Fannie Mae (FNM) and Freddie Mac (FRE), which had been privatized in 1968. The following Sunday, the investment-banking house of Merrill Lynch was forcibly merged into Bank of America (BAC). The next day, Lehman Brothers simply did not open. The old-line investment bank went into an uncontrolled and unsupervised bankruptcy, and all financial-market expectations that the Federal Reserve and the Treasury would guarantee the unsecured debt of every substantial investment bank in America, as they had for Bear Stearns, went out the window. Wednesday, September 17, saw the nationalization of the American International Group (AIG), which, unlike Lehman, was deemed too big to fail. Government-injected cash went straight through AIG and out the other end—like grain through a goose. The forced feeding may total $300 billion before we are through.

Comments

[James Wilson:]

The real truth will come out after a few years.

It is simple, really, there are too many pigs working in the finance sector of the economy. Too people employed in one sectors always leads to chaos as the demand for paychecks out weighs their worth to the overall economy.
Pigs being a relative term because even those with ethics and virtures have been corrupted by the demand of mutual funds demands for fast profits every quarter not allowing for long term planning or investments.

Jun 17 11:28 AM

[drevno:]

It would be too simplistic to assert that the banking system is either essentially sound or essentially dysfunctional. As the story is told, and more and more facts are emerging, it is becoming clear that some banks, some divisions of some banks, some individuals in some banks and some policies both internal and external to some banks have contributed to the near collapse of the banking and financial system. So, on balance, it is not a success story. Coincidentally, or maybe not really so, it is the DEregulated banking system that failed. At least, a powerful lesson for the future.

The subsequent bailout is still works in progress. Whether it was necessary or not is hard to tell. It certainly helped alleviate the anxieties of many individuals, but I do have a nagging feeling that a lot of funds may have undeservedly helped a select portion of the banking system rather than benefited or righted the system as a whole . Let's hope that the decisions and actions of individuals driving it will be a resounding success. Otherwise, where does the buck stop, anyway, if not with the taxpayer? Or his children, and theirs...

Jun 17 11:41 AM

[DaddyPro:]

If they were "too big to fail", they are too big to exist. We need to break them up. How about some hard legislation that restores Glass-Steagall, and prevents the type of M&A gluttony and investment bank incest we have seen over the past decade from building any more non-productive maniacal banking-insurance monsters. SEC, where is thy sting?

Jun 17 01:05 PM

[F. Bradeen:]

That's right. Too big to fail means too big to exist.

Jun 17 01:35 PM

[relayer75:]

I don't think it was "M&A gluttony" and "investment bank incest" that torpedoed the system so much as it was securitization run amok. Anything with a cash flow was securitized, with happy ratings slapped on by the complicit and negligent ratings agencies and/or the MBI's and Ambacs of the world, which by the way turned out to have been the canaries in the coal mine in that they blew up first, in the mid 2007 to January 2008 period (along with Bear Stearns). So, the securitization machine collected the underwriting fees now, and let the buyers of the securities worry about the absurd assumptions and projections regarding future debt service on liar loans and the like. The banks in their greed for "product" to securitize (most visibly, residential mortgages) blew a hole in the hull of the financial system. That's my take.

Jun 17 04:49 PM

[twitee:]

Now the real mobsters are in charge "THE FED", who are they fooling, they were always in charge of the World financial sysytem.....can someone tell us what is new?

Jun 17 05:55 PM

[PainfullyAware:]

Something New - The Federal Reserve Is Hiring The Enron Lobbyist To Represent Them To Congress In July.


The Federal Reserve Hiring A Lobbyist To Combat HR1207
www.bloomberg.com/apps...

A bit of trivia as well: The Fed Was Created In 1913 and by Corollary Or Coincidence the house of representatives was limited in the number of representatives allowed - No Longer A Population Based Representation - In That Same Year.

An Interesting Site That Discusses This:
www.thirty-thousand.org/


Maybe one of those is new to you.


On Jun 17 05:55 PM twitee wrote:

> Now the real mobsters are in charge "THE FED", who are they fooling,
> they were always in charge of the World financial sysytem.....can
> someone tell us what is new?

Jun 17 09:22 PM