Friday 8 May 2009

Finally, some signs that the bankers will face some accountability

TPM has a great new piece on Bush’s quite successful effort to destroy the SEC....

...While HuffPo has a nice item on how Obama will get a little more control over the bankers.

Finance is where the whole financial mess started: with the current bailout money, government should recapitalize the banks, give a 6-month guarantee of all accounts and debts, drop interest rates, and possibly give relief to homeowners, or the small regional banks who are more vulnerable because they are less diversified. In return government should seek partial ownership and voting rights; with luck there will be no need to nationalize entirely. With luck the credit crunch will ease. Then take a good look at the currencies – the strong euro, the weak yuan etc.

The man on the street has cameras watching his every move, police, metal detectors, anti-theft devices in stores...but on Wall Street you can steal billions with no one watching. We got to where we are today by heeding the deceptive siren song of deregulation. Two very popular figures, Reagan and Greenspan, both preached the evils of regulation. They peddled the illusion that financial markets always work, that people and organizations are always driven by the market to make smart and logical choices, that people who handle large amounts of money are inherently more honest than the rest of us and need no oversight. They failed to grasp the fact that without oversight and transparency, no one knows who is honest and who is solvent, and deal-making is impossible – that it is necessary to strike a balance between panic and irrational, baseless overconfidence.

The Asian money crisis and the dot-com bust should have warned us of the trouble to come – instead we bragged about how modern safeguards got us through the crises with little bother. The warning from Enron got us Sarbanes-Oxley regulations, but opponents still whined that it was reducing competitive advantage. Citigroup failed to rein in its more foolhardy dealmakers, leading to $65 billion in losses, a 90 percent drop in stock, and 75,000 layoffs. And finally, the chief at Lehman stubbornly refused to believe it could all fall apart – thus ensuring it would all fall apart.

The mortgage sector, which precipitated much of the disaster to come, will be studied in finance classes for decades to come, an object lesson in what not to do. The Bush administration worked aggressively to relax or eliminate rules and controls on mortgage lending. They allowed no-money-down deals and prevented states from cracking down on predatory lending. They claimed they foresaw the Fannie/Freddy crisis coming, but in fact they fired the regulator who sounded the alarm, replaced him with Bush’s prep school buddy who was incompetent and wildly optimistic in the face of these dangers. They ignored other warnings as well. Lobbyists persuaded Bush not to take action on risky loans, and threatened to block a cabinet nomination unless Bush eliminated rules requiring lenders to explain loan terms; the Godfather of subprime lending, Ameriquest chief Roland Arnall, donated huge sums to the GOP, and the party gave him virtually no scrutiny because they did not want to endanger his appointment as Ambassador to The Netherlands.

The SEC, demoralized and hammered by budget cuts, missed one corporate collapse after another. Even after the Enron disaster, the SEC was powerless: the commission wanted to ensure that shareholders could get more information about company performance, but Bush and the Business Roundtable defeated it. Their chief was pushed out because the industry said he was too aggressive. The new chief, the much more pliant Chris Cox, said Bear Stearns was fine, three days before it fell apart. The SEC has also failed disastrously to enforce anti-trust laws against oligopolies such as the health insurance industry.

As the Huffington piece shows, a battle between the government and the banks is coming, on the amount of oversight and transparency. Let the experts, not the lobbyists, write the rules. The The culture of heavy leveraging and living on other people’s money must be brought under control. The banks must show their risk management models and techniques. We need to strike a balance on cash reserves – big enough to cushion the banks from a fall, but not so big that no money is circulating out there in the economy. Purveyors of complex financial products need to provide better data on exactly what they’re selling and what the potential risks are, particularly since some of those derivatives are supposed to be protecting against defaults. All of this must also apply to non-bank “shadow banks”. The banks can help their cause by taking action themselves to put the bean counters front and center. The Europeans will need to do this too, and eventually the developing world. A year or so from now, we need an unflinching, bloody “lessons-learned” session.

Other sectors of government and the economy need oversight as well – the GAO and DOD contractors are high on the list. And the regulators need a hand from the media and public-interest watchdogs, all of which will help consumers.

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