Financial Reform Part II

There is an old expression that says... when you are up to your ass in alligators it is easy to forget that your original objective was to drain the swamp. We should bear that in mind as congress addresses financial reform.

The original cause of the financial crisis was no doubt poor lending practices; these include excessive stated income loans, interest only loans, sub prime ending , aggressive credit card issuance as well as more than a little irresponsible borrowing etc. Far too creative securitization products designed to free up even more lending capacity followed on. Then came aggressive selling of synthetic products. This was further buoyed by clever packaging and more blurring of the line that separates acceptable business practice from sleazy behavior.

Having said that, none of Goldman Sachs, ACA, IKB, ABN Amro or the rating agencies had a legal obligation to protect the buyer; each of these had disclosure requirements regarding specific assets. IKB is a regional German bank that from all accounts had a inexhaustible ability to shoot itself in the foot. ABN Amro was a formerly well regarded Dutch bank that invested over the top in eastern Europe and in derivative products. Greed knows no nationality.

Only the government had the duty to protect us. The regulators including the FRB, the SEC and others certainly fell down on the job. Look how long it took to catch up with Madoff despite being tipped off numerous times. Now it's alleged Dick Fuld may have substantially understated his income several times and that the regulators were made aware on this on more than one occasion.

Fannie and Freddy have yet to pay the piper for their role in dramatically running up risk. The rating agencies have gone relatively unmarked. When do we fix the fannies' the freddies' and other GSES? Finally, it was the congress that did nothing although consumer advocates warned that people were getting loans they could never pay back; it was congress that repealed Glass Steagall without strengthening regulations and who failed to regulate derivatives. Talk about regulatory capture! There is monumental irony in the Senate investigations committee calling in Goldman so they can have a "post -hoc televised conniption fit on the amorality of Wall St."

It's a shame we can't subject our congressional and regulatory leaders to the same sort of tar and feathering. After all they deserve a great deal of the blame.

It's a greater shame [and a greater irony as well] that given the DC establishment didn't see the housing/loan/securitization/derivatives bubble and its build up of abuses and that we may give them more power to anticipate and prevent the next one! Care to make a prediction?

This is not to say that Wall St works the way it should. It's too clever by half that "market makers" and others can package garbage, get a AAA rating based on the sum of the parts having less risk than the components with minimal toxic product labeling. It reminds me of shoddy home repair firms or used car salesmen. The e mail messages sent by fabulous fab suggest a smug and entitled individual who was not very engaging individual and didn't give a s**t .

But most importantly the swamp isn't drained. We have barely started the pumps.