Last Friday, I tried to bring a few of the threads together to give some background and history to the economic and financial problems we now face. If you missed the post from Friday, July 3, go back and read it. Today, I will try to carry some of those threads forward, and take my discussion another step forward.
We know the history of regulation as it pertains to banking, investment securities and investments. We know that while there were laws on the books, nevertheless, the laws were not enforced. The SEC and the Madoff fraud is just a recent example of the way the Securities & Exchange Commission did not do their job. The idea that deregulation was going to make the banking, the securities and investment businesses run better was a deception and lie from day one. What would an NFL football game on Sunday afternoon look like with one ref controlling the game and trying to enforce the rules? You get the picture. Congress was lobbied to deregulate, and they did what Wall Street wanted them to do. The disaster that followed is as much Congress' fault as anyone's. Deregulation along with new investment products, that did not exist before structured finance and securitization of mortgages et al, left the playing field heavily tilted towards the investment professionals on Wall Street. The lynch pin, in my opinion, that made this all possible was the credit rating agencies passing out their triple-A rating to ever piece of junk that came across their desks. This was the seal of approval that became the kiss of death.
So, where do we go from here? It is evident that the credit rating agencies, which in my opinion, should be taken over by the Federal Reserve Bank, is not going to happen. I would settle to take the triple-A rating away from the credit rating agencies and make that rating the purview of The Fed. The triple-A rating has a lot to do with the soundness of a commercial bank's portfolio as well as many pension funds and other large pools must use the triple-A credit as a guide to responsible investing. The triple-A credit rating should be taken away from the private credit rating agencies, and only be authorized by The Fed. But, this is unlikely to happen. Wall Street and Washington are already laying the foundation of the next financial crisis and bond market meltdown.
This disaster waiting to happen along with the need for institutions and other large pools of money to invest to stay a head of inflation, sets the stage for what is to surely follow, a financial and economic crisis. Until enough people understand how the game is played and take the effort to let their Congressional Representatives know that they know bull shit when they see it, nothing is going to change. Money talks and bull shit walks simply means that your person in Congress will continue to take money from the Wall Street lobbyists and vote in their favor as long as they think you can not tell the difference. When America wakes up to the fraud that has been perpetrated on them for all these years, then change will take place.
Stay tuned.
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3 comments:
Fraud? I'm not so sure that 'fraud' is the proper word - let's say there was a mistake made in formulating the relationship between banks, the investments they make, and the agencies which rate those investments. Perpetuating that mistake, in light of the existence of viable alternatives, isn't fraud, it's just stupidity and politics. The terms are interchangeable.
The fraud I am speaking of is the placing of the triple-A rating on bonds that the rating agencies knew were not worthy of the triple-A rating. That would be like UL putting their seal of approval on an electrical appliance only to have it knock you across the room when you plug it in. Their ratings did not meet their own requirements. They knew this yet they gave these mortgage bonds their highest rating anyway. The money was too good to pass up, and the CEOs wanted to get their bonus for growing the earnings of these publicly traded companies.
Sorry Moneythoughts man. I’ve seen you around. I have time before cleaning my room before mommy-in-law arrives to read your blog. Good stuff here.
I agree with you on this one entirely. I worked for a large insurer for 23 years before the dereg happened and shortly thereafter it seemed everyone was getting into banking and insurance and everything. All these disciplines by themselves are so specialized I couldn’t imaging how any one company could be successful in each one. I can’t imagine still how any one regulator can manage their “creativity.” Then behemoths like AIG were born. Then the keepers of the gates started abandoning their posts. Your UL and NFL analogy is right on.
We also saw this “fraud” with the demise of Arthur Anderson. Written by KEN BROWN and IANTHE JEANNE DUGAN, Staff Reporters of THE WALL STREET JOURNAL, “To make sure auditors weren't just auditing, they began to be judged on how much new business they brought in. A superb auditor ‘who could not get a lick of business’ was secure in the 1970s, says Mr. Measelle, who held the top post until 1997. But now, ‘their job security was a lot less.’”
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