Friday, October 03, 2008

So, What Did Go Wrong On Wall St.

How did out economy end up so screwed up.

Some of the dimmer bulbs on the right have tried to argue that is was a mid 90s change in mortgage law to make home mortgages more accessible to the underclasses. After a little research it was clear that this was absurd. First off, a great number of loans in these programs are over ten years old, and most of the mortgage failures were 5 or less years old. Second of all, there was never enough money in this market for it to greatly impact the system.

While it makes a great attack point for the right, like so many attack points from the right it is based on prejudice, racism and lies.

My view it is a number of factors were involved, that, in the end, come back to a failure in over-sight and regulation.

And this article makes it clear that my instinct was dead on.

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control.


On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on.


The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.


Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.


In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.


The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority. The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.


Drive to Deregulate

The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.

A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies


Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.


Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan,

It was the removal of restrictions, the lack of over-sight that created this mess, and the only real way to fix it is to put regkations back in place at once and then get back on the job with enforcement.

We have had to learn a lesson that will cost us into the trillions of dollars, lets hope our leadership is smart enough to learn it.



Anonymous said...

It is wall streets fault and they will be getting rich with my money I quit

Anonymous said...

Will they be smart enough to learn?
Don't count on it.

Great post. I'm glad you quit yelling at the tv & post here instead.

sexy said...