Bailouts: The Moral Imbalance

When Hurricane Ike hit Texas, the government, acting on our behalf, offered bailouts to the thousands whose homes — built in risk-prone areas — were damaged or destroyed: payment for hotel rooms, aid in rebuilding. But when your neighbor’s house burns down, she gets nothing from us. She gets help only if she has paid for insurance. If that same neighbor gets cancer, she’ll also get no help from us unless she or her employer could afford insurance.

But the government is — we are — bailing out banks that risked too much on bad investments. By buying time, the bailout could also give a lifeline to people who borrowed too much on their homes. If the neighbor lady overmortgaged herself with a now-toxic loan, she might get a break. But if that neighbor lady defaults because she has cancer and has to pay her medical bills before her responsible 30-year, flat-rate, well-documented mortgage, well, she’s out of luck.

Perhaps every sick person without insurance should march on Washington to show that they’re a big disaster, too. Perhaps they should add up the impact of their illnesses on the economy to prove their financial weight. To expose the moral relativism of our collective national view of tragedy and obligation, maybe they should put up signs on their homes and wear badges that say, “Bail me out.”

In today’s NY Times, Floyd Norris argues that it’s worse than that, for the government is bailing out the most irresponsible offenders who put themselves and the economy at the worst risk. Lehman (LEH) wasn’t so bad, so it got nothing. Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), and those teetering now will get saved in some form because of the greater impact of their greed and irresponsibility.

Lehman did not measure up because its chief executive, Richard S. Fuld Jr., simply was not reckless enough as he ran Lehman into the ground.

Had he had the foresight to make a lot more bad bets in the derivatives market, the government would have feared financial chaos and might have nationalized Lehman, just as it nationalized A.I.G., Fannie Mae and Freddie Mac. Or it would have subsidized a takeover, as it did for Bear Stearns.

The Paulson-Bernanke Doctrine is not “too big to fail.” It is “too reckless to fail.” If you get your company into enough trouble to threaten the financial system, Ben Bernanke, the Federal Reserve chairman, and Henry Paulson, the Treasury secretary, won’t let you collapse.

The problem for those left holding the bag — us — is that we have no leverage ourselves to demand conditions in return for our involuntarily generous rescue. Before any bailout is agreed to, shouldn’t our representatives demand responsible regulation in the future and repercussions for irresponsible management in the past — or, for that matter, demand a new look at our national priorities (helping out that neighbor with her cancer and her foreclosure)? No, it’s an emergency. We need decisive action to avoid disaster. No time for that. Of course, we could have avoided this disaster with responsible regulation and management in the past.

I believe in the market but I also believe that government must decide when to regulate just enough. (That is the essence of why I am a Democrat.) Our government has failed us and will continue to, I fear. What we need is a new moral scale. If you put yourself at risk, it is your responsibility to protect against that risk. If you put the rest of us at risk, then you will suffer the consequences but we will have sufficient oversight, demanding sufficient transparency to try to stop you from doing harm. If fate deals you a bad blow, then we need a structure to help protect you (that is, health insurance is just as great a national obligation as after-the-storm and after-the-fall bailouts).

Comments

[Steven Hansen:]

i agree the bailouts do not seem to meet any logical test except where the offender have done something so reckless they endangered our economic system.

our congress has stated openly they do not know what to do. their meager legislative attempts have been penned by lobbyists. they are plainly not in a position to create the framework to "regulate just enough".

it is great you are a democrat - it is lost on me how this helps to solve the problems you outlined.

2008 Sep 19 10:38 PM

[votethemout:]

In this election people should vote against all the incumbents in the congress and senate who voted for this expensive bailout which we the middle class have to pay for while the CEO's make out like bandits. I further feel we should revoke the pension and other retirement benfits for all congressen and Senators who go with this bailout plan. I hate what these politicians and CEO have done to this country.

2008 Sep 20 12:13 AM

[Jlivermoor:]

As for costing the taxpayer, it is more likely that the Federal reserve will make money on the deal. The government MADE money on the Chrysler bail out, The RTC trust from the S&L Crisis in 1990 MADE money in the end. Taking over 80% of AIG just to LOAN 85 billion and then get it back is in fact high stakes loan sharking. The term "bailout" is hugely inaccurate, just ask shareholders of Bear Stearns, Fannie Mae, Lehman Brothers, etc,..........but it makes for good headlines for main stream media to whoop up ignorance in the heartland

2008 Sep 20 12:51 AM

[Jlivermoor:]

This author is definitely the democrat he claims. High moral authority, and little understaning of the economics. These mortgages are worth 95 cents on the dollar if held, and the government can afford to hold them. The breakdown on the system, is not just the excesses by the banks whose bean counters thought they had controlled the risk, but in part due to, and exacerbated by ill concieved mark to market regulation imposed by Sarbanes Oxley. In otherwords, yes our government failed us, the politicians quick to demagogue business and with the hubris to believe government regulation solves everything. It wasn't the CEO's of Fannie Mae's fault, but the politicians who wished to dole out favors for votes on special interests. It started before 1992, but you only need to look at the loans to lower income buyers Clinton forced on Fannie Mae & Freddie Mac.

2008 Sep 20 01:08 AM

[Kinja Rules:]

This wasn't 1 Party or the Other, it was a Huge Speculation Party. The previous poster mentioned this has been going on since '92, correct. We almost had a meltdown in '98 from a Hedge Fund named Long Term Capital Management! The Systemic Risk has been out there for many yrs. These Swaps should have been Required to be Transparent after LTCM. Everything was fine until it wasn't & there was too much $$$ being made to interfere.

We are now playing to Win or Lose All the Marbles Globally. There is NO CHOICE about actions being taken today. This isn't about Bailing Out Wall St. Its about Bailing out You & I now. Banking, Money Mkt, Pension Funds, Municipalities...etc. The Implications of a Direct Collapes of the Financial System is what IS on the line. No Jobs, Values of All Assets De-Flated. Depression is the Deflation of All Assets. In the 30's there was 25% unemployment.

If the US Govt gets their $$$ back from the AIG deal, that will be Great! People are hung on this? AIG has 442 Billion in Insured Product...Go Figure? Media is pumping that this is Great for the Govt. People are Resentful? Poo, they Had to Do This! Do you think China wants to Help? NO, they Have To. That would go for Canada, & Japan as well. We are so interconnected in Finance today, this isn't just about US, it's about the World. Even in Dubai, the property prices are down be 17%, someone lent them the money to build...

Each of US better Pray that Bernake & Paulson can make this work, b/c if they can't, nothing will work for a very long time Globally. We are all in this together, like or not.

2008 Sep 20 02:35 AM

[NickGulliford:]

I can't fault the logic of "the government is bailing out the most irresponsible offenders who put themselves and the economy at the worst risk".

But what about the marital status of those in arrears with their mortgages?

All the evidence I have looked at suggests that cohabiting couples are much more likely to be defaulters than married couples.

If it turns out to be the case that it is the recent and rapid increase in cohabitation which has generated the "irresponsible offenders who put themselves and the economy at the worst risk", what will we say then about the "moral relativism of our collective national view of tragedy and obligation"?

2008 Sep 20 08:18 AM

[notsosmart:]

its hard to talk about morals when their are non.greed & lying are the flavor of the past few years.ethics are gone as people want to "renegotiate a contract".that tells it all.the romans could not care less as they filled the coliseum & the beer(belgium) swillers are still filling our stadiums.

2008 Sep 20 09:34 AM

[ronslim:]

Of course our gov will let us down again because they are not smart enough. Is the solution smarter reps and sens? No! The only workablr solution is to do only what the constitution says the fed gov should do and keep its hands off everything else. The trouble with the democratic view is always debating "who deserves what" and "from whom shall we take it". Talk about morality, ah jeees, give me a break. Anyone who thinks this great rescue will not further our march to the abyss is deluded. This march started with the creation of the federal reserve system and will end either in the complete dissolution of it, or of these United States.

2008 Sep 20 10:50 AM

[User 211108:]

The thing not mentioned in this excellent article, is, the cost of the utterly unnecessary, unfounded, and likely illegal war in Iraq. The Billions spent, the lives lost on both sides, and the damage to our already impaired reputation in the world have added to the misery. Had our fearless leader not led us into the conflict in a useless search for WMDs we might have had enough dollars to avoid the present situation.

I am unsure of whether there is any one individual in a position of authority today (in either party, or claiming to be an all knowing economic guru) that will have a viable, implementable plan to get us out of this mess. Unfortunately we get what we elect. The choice we made eight years ago has come to haunt us, and we are about to make another choice. The tone will be set by which of the two candidates gets the job, and the present economic crisis will define our lives, economic worth, quality of life and position in the world for decades to come. Mr. McCain is the lesser choice as his intellect is just not evidently present. Mr. McCain is filled with utter blind ambition, but lacks prudent, measured judgment to make the decisions necessary with regard to the economy and in foreign relations. His recent comments about this situation certainly illustrate that he has no idea what is going on, and isn't going to waste time trying to really understand. He is a typical military type A, shoot first, ask questions later. He is not really very bright in contrast to Mr. Obama, and his experience of which he makes so much noise about is really not very impressive. After 26 years in the Senate, what exactly has he done to learn about economics? Nothing really, but he has paled around with his cronies in the Senate and quietly helped out the very pillars of Wall Street by neglecting to really fight for viable regulation, not just talk about it. I am not really thrilled about either of the two choices, nor for that matter any of the field of would be leaders, but I am going to vote for intellect, over bravado, not "John Wayne McCain". Remember, if he had not been so ambitious, brash, and had done as ordered by his superiors, George Armstrong Custer could have been running for, and been elected President. Given that he was not of great intellect having graduated at the bottom of his military school, just like Mr. McCain, ask yourself how well he would have handled the issues of his day? Being brave, even fearless, and successful in military engagements (winning battles), is not enough to justify electing someone to high office. Wrapping yourself in the flag and using your POW status as some kind of a special qualification to be President is disgusting and has no place in the campaign. Demonstrating that you have the actual ability to command and make wise, carefully thought out decisions does, but Mr. McCain was an ordinary sole bomber pilot, and didn't command anything.

The choice we make for the next President will define our future. What we as parents really need to be concerned about is the future for generations to come, not only in this country, but worldwide. How this economic crisis is handled will in large measure determine that outcome. I am going with he smart one, not the big brutish talker. Disclosure, long on Obama. An unwilling but honorable participant in our last military adventure circa 1968.

2008 Sep 20 11:28 AM

[Obama is Bu...:]

<i>Jlivermoore: "This author is definitely the democrat he claims. High moral authority, and little understaning of the economics. These mortgages are worth 95 cents on the dollar if held, and the government can afford to hold them."</i>

Obviously, little understanding of economics is a widespread problem. Home prices are off 15% nationwide (more in some "bubble" areas) -- so at best these mortgages are worth (on average) 85 cents on the dollar.

Even then, home prices are still much higher than historical norms when viewed as a multiple of income. If you understand economics, you must know that home owners need to have income with which to pay their mortgage. Home prices, as a multiple of incomes, are simply too high-- so even 85 cents on the dollar is likely too high.

Mark to market is not a perfect system, but you seem to have a very short attention span. The reason mark to market became so popular is because of the many problems with cost based accounting. Both systems have strengths and weaknesses -- but neither is a "cause" of the current problems.

Home prices got too high relative to incomes. People bought these overpriced houses using way too much leverage. Wall Street bought the mortgage loans using even more leverage.

Now home prices are reverting toward their mean "multiple of income" -- just as they have throughout history. There is nothing new or unexpected about this.

The problem is the degree that housing got overpriced, and the absurd leverage that was used to finance those overpriced houses. It does not matter if you use cost basis accounting or mark to market accounting -- you still have a huge loss.

If this Super SIV thing comes to pass (it is not an RTC like plan no matter how Paulson tries to market it) -- the government might end up with an accounting "gain"... but only because the government's accounting systems do not factor in full cost of carry.

The only way the government (or any private buyer) can make money on these mortgages is if average income levels rise faster than historical average (to bring home prices back into "normal" multiples) -- which seems unlikely given US labor prices are already higher than the rest of the world. The only other way to make money on these mortgages is to buy them at a very big discount (i.e. a lot more than 15% discount)

2008 Sep 20 11:41 AM

[RickRussellTX:]

I'm going to tease some truth out of a response that I otherwise don't agree with:

"These mortgages are worth 95 cents on the dollar if held"

The question is: is this actually true? That actual mortgage default rate may turn out to be about 5%. I've seen competing figures of 3.75% to 4.5%, but the worst may not yet be behind us, so let's assume 5%.

In principle, then, 95% of the mortgage assets can be valued at their stated value, while perhaps 5% will have a value below their stated value. In some case, far below their stated value, but in most cases, perhaps 30-70% their stated value, since the properties will be sold and the proceeds divided among the mortgage-backed security holders.

However, that assumes that home prices stabilize. If they do not, won't defaults go up? Few people will be willing to pay for a $500000 mortgage on an asset that is worth $300000 or less, and for them it may make sense to walk away, deal with the credit problems, and get back on an even footing in 5 or 7 years. I have a relative who defaulted on a mortgage -- BADLY, by just walking out and refusing to check her mail -- and she repaired her credit and was offered a new mortgage in 4 years.

The fact that young wage earners are essentially priced out of the home market in many regions is a suggestion that liberal mortgage policies (and let's face it, fraud) created an artificial elevation in home prices. Home prices are directly related to mortgage rates and liquidity. If rates go up or liquidity is permanently reduced (or both) then home prices will truly adjust downward.

That's why these assets are so toxic. Sure, 5% looks like a realistic number now. Realtors I've talked to say that about 30% of home recent buyers are in bad mortgages *right now*, at current home prices. What if the final number is really 50%?

Of course, we may not have a choice. The person who made off with the money -- and the person who was least culpable in this disaster -- was the home seller, who didn't commit fraud or put anybody in a position of taking on a bad mortgage.

2008 Sep 20 11:42 AM

[Obama is Bu...:]

BTW -- I forgot to mention why home prices being off 15% translates one for one into mortgage losses:

Home "owners", especially ones who bought in recent years at inflated prices, generally took out mortgages with little or no money down.

When you sell a house, you pay 4-5% to a realtor and another 1-2% in a "stamp tax" (some municipalities call this a title transfer fee). So it costs somewhere between 5-7% to sell a house. This means that people who put down less than 5% (which is a significant part of recent loans) really have zero equity in their house, even before accounting for home price declines.

If you add the nation wide average home price decline of 15% to the 5% cost of selling -- many home "owners" are looking at a 20% loss on an asset where they put down perhaps 10% (often less).

These people have no skin in the game. Economically speaking, they are renters. The mortgage lender (the "investor" who ultimately bought the loan) is now the owner, and will be very lucky to get 85% of his principal back -- never mind any interest.

2008 Sep 20 11:52 AM

[User 143167:]

Jlivermoor, you are totally wrong.
The structured products these bank hold are not 95 cents on a dollar, not even close. This will be end up like RTC in 1990s and this housing bubble is nowhere as "healthy" as the one in S&L crisis. This is a credit bubble that never seen before. Look at the 0% saving rate and 100% household debts to GDP ratio. Without those liar's loan, the house will be a free fall for many years because the housing demand will be very thin without the help of those liars.
There is also no new tech or new economy like we have in 1980s or 1990s. The government is desperately trying to find the next bubble, but they are not able to find one right now to counteract the deflating housing prices. So they now decide to inflate the housing market and economy at whatever cost it may take. This will bear ugly results ahead. You guys are crazy to think that history will repeat itself. Look at this country, the economy is a holy cave without financial service and housing.

2008 Sep 20 11:58 AM

[Broken:]

Jlivermoor says: "As for costing the taxpayer, it is more likely that the Federal reserve will make money on the deal. ...The RTC trust from the S&L Crisis in 1990 MADE money in the end. "

If you believe that, I have some CDOs to sell you. The RTC bailout cost taxpayers $124 billion. See:

www.fdic.gov/bank/anal...

2008 Sep 20 12:48 PM

[wheresmymoney:]

The author of the aritcle is a true democrat. Not only counting the goverment putting billions of dollars into this mortage fund to buy up the bad loans, does beign a Democrat make it better? The housing market is dead right now, whether you bail out the crooks or not. Why go after the crooks who put us in this positions and bailed out of the companies months ahead of the crisis, knowing it was coming and left with millions in their pocket. Make them pay for the crimes they have done, just like Enron, etc. have done. Also if Obama gets elected and taxes the rich, which is if you or your business makes $250,000.00 or more he get 50% of our money. I own a small business that makes more than that, and our wages are at that rate, so we will lose 50% of our business income in taxes, 50% of our income in income taxes, where does that leave us? Will we be the next ones not being able to pay our mortgage payments? Obama says he will take our money, that by having a small business we took the risks of having it, we employ other people and give them jobs, and give that money to a waiteress because she makes minimum wage because she has no job skills? Is that our fault or our problem? Now that 50% of our business income is gone, it will be a domino effect on our employees who we give jobs to. We won't have the money to pay their salarys so they will be laid off, and won't be able to find any more jobs because of everyone else getting laid off. But the waitress with no job skills gets a tax break, gets our hard earned money that we worked sometimes 14 hours a day to make, and that is not counting all the illegal aliens living off our tax money that we earn, getting free medical, pay no taxes, take their money back to Mexico and puts it in their ecomony and come back and do it again. So his plan leaves us and our business in the poor house, if we still have a business left. Is this fair redisribution of money, that we work so hard to make? As a business owner we take the risks, we employ people, we make the ecomony grow. What will happen then when Obama takes all our hard earned money and gives it to people who have no job skills, take no risks, etc. Where does that leave the country? This domino effect will be much bigger than the financial crisis we are in now. McCain wants to lower taxes, will stand up against foreign powers, etc. He is our only hope of not going into another depression. There is no easy answer for this economic crisis, that started in 1999 when they de regulated the stock market and the crooks took over. Also Clinton wanted all the minoritys to be able to buy houses and they were giving them loans they couldnt afford, started Freddie and Fanny. There are no easy answers for this crisis, but if the goverment doesn't do something we will be going farther down the hill. If Obama gets elected we are in real trouble!!!

2008 Sep 20 01:04 PM

[Broken:]

Heh. If Obama gets elected, we are in real trouble? What are we in now, exactly?

Yeah, better to leave the government in the hands of the corrupt idiots we have now. Because Obama will bring in losers like Paul Volker, Warren Buffet, and Rubin- guys with terrible tract records.

Much safer to go with McCain, with advisors like Fiorina and Gramm. Real winners, those two.

2008 Sep 20 02:16 PM

[notsosmart:]

has it dawned on anyone that this election gives us no choice.but does that really matter to dumb-dumber americans who reelect the same fools & then give them a 9% approval rating.as an indepedent voter of more years than i care to remember i feel sad at whats happening but these are the folks you put there.lets keep worrying about abortion & gay marriage & the ten commandments in schools(the guy in congress who wanted this could not name them)& all our problems will be solved.

2008 Sep 20 03:10 PM

[Schweizer:]

Beware - slippery slope.
www.youtube.com/watch?...

2008 Sep 20 03:38 PM

[satguru:]

I just cannot believe the mass ignorance of the American electorate but no - I can!!! How can we believe anything this admiinistration tells us. Once again shock and awe with lies. How did they come up with the figure of 700 biliion? What hat did they pull this out of?
They sold us the war in Iraq with lies - read my lips - Saddam was not responsible for 9-11, no, there was no weapons of mass destruction, no, we have not won the war either in Iraq or Afganistan and no there is no subprime mortgage worth $1 trllion dollars (we have already used over $500 billion in bailouts and these crooks are asking for 700 billion more. This is all a set-up. First you blame it on the poor (sub-prime welfare types) and then you sucker the rest of the people into believing this and then you raid the coffers on the backs of these idiots who fall for the lies and they win again and again. What will it take for the people to learn. NO MORE BAILOUTS - PERIOD. THIS 700 billion is a drop in the bucket for the problem we are facing.
These are the facts:
-We have a 3 trllion dollar mortgage market in this country.
-13% of this market is considered sub-prime (fico score of less than 620)
-Out of this 13% we have about 1 to 2% in default.
So with a 3 trllion mortgage market, that would give you about 235 billion subprime (13%)
Out of this we have a high of 2% in default which would make that amount around 5 billion.
Now tell me who are we bailing out? Why do we need 700 billion more than the 500 billion we have already used. IS THIS A SUBPRIME PROBLEM - HELL NO!! Just another in a string of lies to dupe the electorate and right before elections.
It is not a Democrat or Republican thing. Both parties are equally responsible. When will we have truth, when will the lies stop, when will we have honesty in our elected officials.
This 700 billion is a drop in the bucket. What will be done for the 600 trillion derivatives market, the credit card crisis which is right on the horizon and where is the rest of the world in sharing this burden. Why more than 90% of the bailout cost is on the backs of the American people. It is time to say no - ENOUGH!

2008 Sep 20 04:29 PM

[DrGREEN:]

Affordable health care for all Americans has been an issue since the Truman administration. However, within the global market, health care has become a burden on multinational corporations headquartered in the United States. Furthermore, it has become more burdensome for American families. The main reason for bankruptcy in the United States is the inability to pay for medical expenses. In 2006 more women filed for bankruptcy than enrolled in colleges and universities. Most of these bankruptcies were the result of an inability to pay for health care. The United States is one of very few industrialized countries that have health insurance linked to employment. Since individuals, in collaboration with their health care providers, know more about their health than the insurance firms, the most obvious reason for this system is for the insurer to be able to insure mainly the healthy members of the population. The premise is that the healthiest members of the population are the ones who are able to work. The debate regarding health care as a right or privilege has not been substantially settled. Should public health care be treated as a right? Or is it a privilege? Should the businesses that comprise the health care industry be treated as a regulated monopoly?

Many leaders in the health care industry keep telling us that Americans do not need a health care system run or controlled by the government. Whether it is run by the government or private enterprise, people want and clearly need affordable health care.

One part of the solution for reducing the escalating cost of health care is to create a single health insurance payer or a quasi-governmental health insurance agency. The proposed corporation would negotiate drug prices and payments for hospitals and physicians and would provide malpractice insurance to health care providers. As a natural monopoly, such an insurance agency would have lower costs due to economies of scale. With a single insurer, reimbursement and billing would be standardized, which in turn would reduce the cost of services provided by hospitals, physicians, and other health care providers. This would result in an economically efficient health system, providing access to care through equitable financing, efficient supply of services, and financial sustainability.

Another key facet of the solution is to stop linking health insurance to employment. If the healthiest members of the population were permitted to obtain health insurance outside the system insuring the vast majority of the population, the costs for care of the rest of the population would be inordinately expensive. The final facet of the proposed solution is including health promotion and disease prevention services within the health insurance program. It behooves the program to have clients improve their fitness and mental/emotional well-being to avoid expensive health care services. In long run, market forces would moderate demand for health care.

2008 Sep 20 06:09 PM

[meta99:]

There's a lot of long winded arguments here but I can give you a simplified opinion of how much these mortgages are worth.....
HIstorically home prices appreciated about 4% per year for the 50 years leading up to 1995. From 1995 to 2005 home prices appreciated about 8% per year, nationally. That means that home prices appreciated about twice the norm, and in 2005 they were 40% overvalued. Allowing for some inflation in the past 3 years, if home prices corrected 30% or so they would be close to fair value.
However, this only represents PROPERTY VALUE. THe mortgages that the Fed would buy are the JUNK class, usually overly indebted stuff that no one wants, many of whom were written far in excess of the actual underlying value, so cut that 70% in half.... that gives you 35 cents on the dollar. Merrill sold some of this junk for 20 cents on the dollar.....granted that was a distressed price. My guess is that the fair vlaue of this toxic waste is between 25-35 cents on the dollar. Hopefully there will be buyers for this crap but it sure won't be anything I'll put my money into.

2008 Sep 20 10:04 PM

[meta99:]

Gramps.........
Great commentary..... keep up the good stuff. One more point from my last post; So far the ONLY indication of what this stuff is worth is the sale of the Merrill Lynch assets to a hedge fund for 20 cents on the dollar. Lehman had so much toxic waste that no one would buy them despite some very valuable properties and an alleged book value in excess of $20 per share. So realistically, how can these mortgages be anywhere close to what J Livermoor suggested above?

2008 Sep 20 10:10 PM

[williambanzai7:]

Wall Street, Bush, AAA Lawyers and the Demise of Accountability

We live in a time when political and business leaders are able to avoid being held accountable for their acts of gross negligence and wilful misconduct. Sounds like lawyer talk. Well lawyers are intricately involved in this sorry state of affairs. Lets take the Bush administration. What did all the Republican cronies like Cheney learn from the Nixon saga? Don't put yourself in weak position legally. Don't testify under oath, better yet don't testify. Don't provide information under threat of perjury and obstruction of justice, better yet don't provide information. They have artfully avoided political accountability for a litany of constitutional abuses, executive misconduct and malfeasance. They are also getting AAA legal advice.

OK, now lets consider what has happened in the financial services industry. Until recently, our securities laws forced Wall Street to worry about the way it conducts business. Don't play by regulatory rules with origins in Roosevelt's New Deal and sooner or later the SEC or Elliot Spitzer will hunt you down. You had to worry about adequate disclosure and a battery of rules designed to protect average public investors. If you misbehaved, you also had to worry about a ravenous plaintiff's bar charged with the duty of prosecuting claims on behalf of investors unable to fend for themselves (for a generous fee, of course). More AAA lawyers.

Those New Deal rules are still there. However, Wall Street has managed to water everything down to the point where a manmade Katrina hits the financial markets and there is little or no means to hold the perpetrators accountable. Don't hold your breath waiting for the SEC to chase the bankers that designed, peddled and later lied about their exposure to toxic jackass backed securities. What about Credit Default Swaps? Oh, those so called financial weapons of mass destruction are not securities within the meaning of the securities laws. Those are cutting edge risk management tools. How about victims like poor old AIG banding together to sue those who set them up with these improvised financial explosive devices. Never mind, those were sold to "sophisticated" and "accredited" investors able to fend for themselves. Sales to these financial sophisticates are not subject to the same legal regime. We now see that "sophisticated investor" means one who expects to be bailed out by Uncle Sam. Finally, you won't be seeing any widows and orphans starting class action suits, because no one sold them any securities. Instead, they are accused of being financially culpable in this mess because they fell prey to the army of mortgage brokers who aggressively peddled shadow bank loans. Mortgage brokers owned by who else? Wall Street investment banks like Merrill, Lehman and Bear Stearns. Shadow bank loans? Yep, more AAA legal advice.

Let the markets regulate themselves! That is the fundamentalist mantra of the lords of the Street. Well, that is what the market was actually doing until this past Friday. Self regulation came in the surprising form of punishment by the shorts. After all, it was the hedge fund industry, Messrs Einhorn et al, and not the SEC that called Lehman and AIG to the carpet. Not to worry, Mr. Cox, a Wall Street lawyer who runs the SEC, has fixed the short problem for his former clients/masters. Trading bets against financial institutions are now banned. In a comic twist, the SEC is planning to force hedge fund managers to testify under oath. Something more than you can expect from the likes of Harriet Myers, Esq. and Alberto Gonzalez, Esq. Ultimately, the reckless bets that the investment banks made with shareholder capital will go unpunished. Still more AAA legal advice.

Well you begin to see how what seems like one big scam is actually a legally airtight apparatus for screwing Grandma, Grandpa and Joe public in an indirect manner without being held legally accountable. Time to throw out all of the New Deal regulatory assumptions and start all over again. Wall Street, like the Bush administration, has managed to innovate its way out of corporate accountability-- the old fashioned way: hire innovative AAA lawyers. 

One hundred years ago a man named Franklin Keyes, Esq. (you guessed it, a Wall Street lawyer) published a tract titled: "Wall Street Speculation, Its Tricks and Its Tragedies". In it he says: "Wall Street is dominated by some of the brainiest and shrewdest men in the country, natural born sharpers and schemers, and before the average man can get the better of them, except through the merest chance, he will have to eat brain food for a long time." Well said Mr. Keyes. Nothing seems to have changed, particularly the need to hire AAA lawyers.

WilliamBanzai7
September 2008

2008 Sep 21 02:08 AM

[williambanzai7:]

Bernanke's Big Rock Candy Mountains

(to the melody of Big Rock Candy Mountain)
Lyrics By WilliamBanzai7


One evening as the DOW went down and the ABX was burning
Down the track came a banker hiking and he said boys I'm not turning
I'm headin for a land that's far away from Wall Street's crystal towers
So come with me we'll go and see the Bernanke's Big Rock Candy Mountains

In Bernanke's Big Rock Candy Mountains there's a land that's fair and bright
Where the handouts grow from the Bush bailout pros and you sleep sound every night
Where the ABS books are all empty and the sun shines every day
On the birds and the bees and the bonus trees
Where the perrier springs where the squawk box sings
In the Bernanke's Big Rock Candy Mountains

In Bernanke's Big Rock Candy Mountains all the regulators have wooden legs
And the shorts all have rubber teeth and the taxpayers lay golden eggs
The traders books are full of fruit and the bankers play all day
Oh, I'm bound to go where there ain't no snow
Where the rain don't fall and the wind don't blow
In Bernanke's Big Rock Candy Mountains

In Bernanke's Big Rock Candy Mountains you never sell your stocks
And the little streams of Interest come a-trickling down the rocks
The enforcers have to tip their hats and the bears and shorts are banned
There's a lake of stew and of champagne too
You can sail all around 'em in your custom yachts
In Bernankies Big Rock Candy Mountains

In Bernanke's Rock Candy Mountains white collar jails are made of tin
And you can walk right out again as soon as you are in
There ain't no short handled shovels, no axes saws or picks
I'm a goin to stay where you sleep all day
Where they hung that jerk from Berkshire Hathaway
In Bernanke's Big Rock Candy Mountains

I'll see you all this coming fall in Bernanke's Big Rock Candy Mountains

2008 Sep 21 02:38 AM