Sunday, July 25, 2010
Former Goldman CEO Henry Paulson, it has been reported, once again has declared that the "root cause of all this are housing policies," referring to the 2008 meltdown, and that the reform legislation has not focused specifically on housing policy. Although reform has not specifically focused on housing it is a misleading conclusion only designed to avoid blame, and not illuminate the real root cause - which is Financial Darwinism.
So Paulson, a former Prince of investment banking, once again indulged in blame shifting. To focus on "housing policies" as the primary cluprit is to avoid a clear view that Wall Street's voracious demand for enough mortgages to package into "too complex to explain" investments fueled the demand for more and more mortgages. Do not overlook how badly Wall Street needed tons of mortgages to turn into "complex financial instruments" to securitize and then sell to satiate its greed-based, rapacious appetite to create fees. Fees were the rule and the ethic - not value for investors.
Last year Mega Bank Holding Companies, which had been investment banks, generated record profits. Hiring has resumed at record salaries, becuase Wall Street has not missed a step as it continues to contrive egregiously leveraged complex investments, sometimes referred to as financial instruments. Certainly banks are not using much of their capital to fund capital formation, ie., loans to small businesses to create jobs by underwriting businesses that desparately need money to exist and possibly expand.
These complex financial instruments, like those of the past that did us in, still offer the illusion of guarantees - and are still referred to as "colaterialized." Collaterialized by what - the mirage of a Credit Default Swap.
Now our regulators have another 2,000 pages of reform. In the year 2000 the Fed had over 1,550 pages of Bank Holding Company Regulations . If the Fed had only enforced one reg that prohibited selling a security that could not be explained well enough to be understood - then none of the "too complex to explain" complex financial instruments could have been sold. The SEC could have stopped the collaterialized debt obligations by using regulations in effect in 2000 which addressed disclosure and the ommission of significant information. Finally the SEC has recoginzed this (a little late) and slapped Goldman on the wrist with a 500MM fine; small change compared with their egregious profits in the past and their continuing use of crazed leverage. I have contended in my book that the "too complex to explain" were material violations of existing regs; the SEC has not gone far enough yet.
But good news - now we have a "systemic risk regulator" to spot the toxicity of too much leverage. This is absurd considering the self-evident toxic nature of too much leverage-debt. When so much money was being generated by leverage no one wanted to turn off the faucette, although so many smart economists working for the Fed had to have some awareness of the evils of debt and the lack of sense behind the too complex to explain. Regretably our leading regulators agrued for deregulation which unleased a renewal of Laissez-faire economics from the days of Social Darwinism.
Our financial media has not properly investigated or analyzed the substance behind what is reported as, or deemed to be, an empirical pronouncement. Or are they are on the side of the Laissez-faire economics which led to the "Great Depression?" It is possible they are too young to make the distinction between the Chicago School of Econ from the late 70s and the rational concerns of economists like Samuelson and Thurow from the aftermath of the depression.
And too many respected members of the Fourth Estate appear to be comfortable passing on arogant excusses and phony reasons, without probing questions, from all the heavily credentialed, expert pundits who should have known enough, but failed to recognize that too much leverage, if everything does not go exactly right, turns into poison. Of course the risk of way too much leverage was/is "insured" and this fictitious insurance is what killed AIG and the others who assumed that everything would always go up. Where has investigative objectivity gone? Is it OK to pass on hopelessly slanted opinions which in turn create uninformed public opinion?
We are still using and buying into concepts like "collateralized debt obligations." And our new so-called financial reform has not truely addressed the lack of real substance behind what is purported to be collateral. For example the Credit Default Swap lives on, and there is no legal definition governing how this "insurance" is backed up by any form of rational reserves to underwrite the toxicity of too much leverage still being "collateralized" and insured. The government is still on the hook, which means we are still providing the collateral for Goldman to churn financial products for fees, some of which have finally been related to fraud!
All the truth and nothing but the truth - is still missing in action. The truth of what our former investment banks, now Bank Holding Companies, are not required to do is obvious to all the small businesses who need capital. These so-called banks are still using 100s of Billions free capital provided by the FDIC to support the leverage behind their proprietory financial products issued and sold to provide revenue for their own greed, how do you think Goldman generated record profits last year? The truth of morally backrupt economic policies from Friedman and Greenspan is still shoved under the rug. And an Everest sized iceberg of unemployment still lurks under the surface of Wall Streets recovery. Because Banks are not required to make loans to small businesses based on some relationship to the Billions and Billions of essentially free capital provided to them by the Fed and the FDIC - our recovery is more for Wall Street than mainstreet.
Don't forget Banks make so much more money using leverage for their own accounts than they can generate by lending to small businesses. So there is far less motivation to lend for capital formation. And Financial Reform which continues to allow Banks to use leverage - (based on funds from the Fed and the FDIC, our money) - for financial investments in lieu of lending for real investment is wrong. The continuing problem is that investment banks, like Goldman, have been allowed to remain bank holding companies, so they qualify as banks to receive vast sums of money from the Fed and the FDIC - therefore shift their still highly leveraged risk to the government.
Reform is to abolish abuse. Womens Sufferage, Glass-Steagall and The Civil Rights Act are examples of government legislative reform. Reform which focuses on how to spot too much financial risk faster, when the Fed blew it in the year 2000 by not spotting the ludicrious fallaceous nature of Credit Default Swaps to cover up the risk of egregious leverage is misleading. Reform which does nothing meaningful to curb CDSs is ludicrous. And reform which does not require all the new Bank Holding Companies, which were formerly investment banks, to lend to small business to stimulate capital formation to create jobs is a stain against humanity and truth.