Mr. President, last week’s revelations about Lehman Brothers reinforce what I’ve been saying for some time. The folly of radical deregulation has given us financial institutions that are too big to fail, too big to manage, and too big to regulate. If we have any hope of returning the rule of law to Wall Street, we need regulatory reform that the addresses this central reality. As I said more than a year ago: ” At the end of the day, this is a test of whether we have one justice system in this country or two. If we don’t treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole 500 dollars from a cash register, then how can we expect our citizens to have faith in the rule of law? For our economy to work for all Americans, investors must have confidence in the honest and open functioning of our financial markets. Our markets can only flourish when Americans again trust that they are fair, transparent, and accountable to the laws.” — Senator Ted Kaufman
Three cheers to Senator Kaufman, you can and should read the whole speech.(tx zh). What we need to understand is much of the financial innovation of the past decades was fraudulent, allowing simple manipulation at a massive scale. Bill Black and Eliot Spitzer have an excellent piece at New Deal 2.0 calling for congressional investigations, this has to be done. Any so-called financial reform, without extensive background to what was done, is simply a charade, but DC’s very good at that these days.
Zero Hedge also has a very good piece on securitization, particularly mortgage CD0s, writing, “But even smart people can be fooled by CDO terminology, which is Orwellian by design.” It’s a good take on how Michael Lewis, who in the past has written some excellent pieces on Wall Street, completely missed the plot in his newest book. Lewis praises a handful of traders who were shorting(betting against) all the debt dreck. What Lewis misses, shorting was a big part of the game. Firms such as Goldman were knowingly peddling garbage to their customers with one hand and shorting with the other. Of course, it took the AIG and the rest of the bailouts to make their bets good. Yves Smith has a very important piece on this coming shortly.
All this begs the question, how much fraud was involved — the short answer a lot. If much of the debt was fraudulent, let’s declare it null and void, starting with what’s on the books at the Fed, Fannie and Freddie. That will help the deficit. What say you Mr. Gross?(tx ames)
Cross-posted from Archein: a spine evolves in Washington
Archein