As a conservative and almost libertarian, I am a die-hard free market capitalist. It is a rare day indeed when I support government regulation of private enterprise. Today is one of those rare days. Please bear in mind that when I speak of Wall Street, I am referring to the major investment banks and other big financial institutions.
Paul B. Matthews writing for American Thinker yesterday informs us that while we were focused on Mitt Romney and Obama exchanging barbs over Bain Capital, another scandal occurred in the financial markets:
For the second time in less than a year, a large Futures Commission Merchant (FCM) has collapsed after firm officials stole customer money to fund business operations and their exorbitant lifestyles.
With last week’s collapse of Peregrine Financial, the U.S. Congress should be asking, “Do any of the field examiners and their managers at the Commodity Futures Trading Commission (CFTC) have any clue what they are doing, particularly since they signed off on the firm’s financial statements as recently as January 2012?”
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As a certified public accountant (CPA), I am stupefied at the sheer lack of sophistication used in this fraud. As a taxpayer, I am horrified by the absolute lack of competence or pure laziness exhibited by regulators at the CFTC.
Wall Street scandals are becoming all too common. Remember the case of MF Global and Jon Corzine? Under Corzine, a Democrat “bundler” and once considered a candidate for Treasury Secretary, 1.6 billion dollars of client money disappeared. And, Corzine is still a free man and is still a Democrat campaign funds bundler for Obama. Then there was the case of Goldman Sachs being charged by the SEC for defrauding investors. Goldman settled for 500 million dollars without admitting any wrong doing. And, of course, there is the ongoing LIBOR scandal that threatens to get bigger and bigger.
It is frustrating, to say the least, that these Wall Street wizards never pay for their crimes. After all, they are the ones responsible for the subprime mortgage bubble that caused the Great Recession, right? Well, in my opinion, no. The financial collapse was caused by politicians and the Federal Reserve, Wall Street just found a way to take advantage of the bubble and added to the crisis. Think subprime mortgage derivatives and credit default derivatives. Mr. Matthews, in the AT article linked above, makes a solid case for the ineptness of the Commodity Futures Trading Comission (CFTC). But that was not aways the case.
Let me share with you my version of who was responsible for the sub prime mortgage fiasco and I’ll also tell you about one valiant lady who foresaw the danger of an unregulated derivatives market.
My story begins with the Clinton administration which decided that the banking industry didn’t need to be regulated and repealed the Glass-Steagall Act which forced banks to separate their conventional banking separate from their investment banking. Under Clinton, Jimmy Carter’s Affordable Housing Act was put on steroids. People like Barney Frank and Chris Dodd and others put great pressure on Fanny Mae and Freddy Mac to pressure banks to lower their lending standards so that people who otherwise didn’t qualify fora mortgage could now buy a home. In other words, it wasn’t the banking industry that started the housing bubble, it was our government. The bankers, being smart people, looked for a way to protect themselves and they latched onto the idea of bundling the sub primes with good mortgages and sold them to their clients. this led to a derivatives market in mortgages and to further protect themselves they invented the credit default swaps and then tried not to be holding the bag when the bubble would surely burst. During this time, a lady by the name of Brooksley Born was Chairman of the CFTC. From this source we learn:
As head of the CFTC she called attention to the existence of a market in Over the Counter Derivatives; in essence, risk instruments that various players on Wall Street enter into to protect themselves from unforeseen calamities. At that time, around 1993, it was a completely unregulated $27 Trillion market operating in a “black box” environment.
Brooksley Born testified at least four times to Congress concerning the dangers of this fast growing, unregulated and highly secretive financial market. She was concerned because the market was utilized heavily by the banking and financial services industries and involved huge “bets” by well know financial players such as Bank of America, Lehman Brothers, Bankers Trust, and Long Term Capital Markets.
To make a long story short, after writing of her concerns to the President and to Allen Greenspan, she was effectively told by Greenspan, Treasury Secretary Rubin and Larry Summers and others to go sit in her unimportant office and keep her mouth shut. The reasoning of Greenspan & Company was that Wall Streeters were very sophisticated and they could handle the derivatives market and easily manage the risks. Well, we all know how the failure to listen to Ms. Born worked out, don’t we?
So, my answer to the question in the title of this post is: no, Wall Street is not capable of regulating itself. They have proven this time and time again. We need to scrap the Dodd-Frank nightmare and put Glass-Steagall back in place. And, maybe someone should look up Brooksley Born and ask her what to do about regulating the derivatives market.
Well, that’s what I’m thinking. What are your thoughts?
Asylum Watch 
Yes. By all means bring back Glass-Steagall. However I am still convinced that having the government try to regulate the bankers can have worse consequences. What’s the solution? I don’t think there is one, human nature being what it is. We just have to try and get through it.
You may want to checkout economist and professor; Larry Kotlikof. He has some interesting ideas.
The market is made up of way to many who simply operate on fear and greed. Lacking in any moral convictions, we are forced to play with these devils with our pension funds and retirement funds. Unless we want to pan for gold, the fix is in. No one can live on investment income at 1percent.
Heh! We might make more panning for gold. How sad is that?
Yes, bring back Glass-Steagall. Additionally, we need to scrap all the finance regulation and the army of ineffectual bureaucrats and pass a few simple laws. First, The principles of a financial business are liable for losses and criminality. That’s the way it used to be, and it was why bankers jumped out of windows when the market crashed. If you caused the loss, you eat the loss and get punished for it. No government bailouts.
Deposit insurance needs to be privatized. Private insurance is better at rating risk than the US government, and a bad rating would drive people to pull their money out and go somewhere else.
A market can be self-regulating if you don’t shield potential malefactors from the consequences.
Great points, Kurt!
Agree, we first must get rid of Dodd-Frank. However, the Glass-Steagall Act is a pre-Wall-Street-Derivatives-and-Other-Financial-Instruments tool and will not prevent these kind of financial shenanigans (Madoff-MFGlobal-Perigrine); much less too-big-to-fail.
Even though I agree that some legislation is needed, it needs to be minimal-but-smart. All three problems mentioned above could have been detected with present regulatory rules if the people in charge were appointed on merits instead of political appointments.
But if I were made to accept an uncompromising solution between Dodd-Frank type of government intervention on one side, or, occasional MFGobal-Madoff-Peregrine shocks, I will take the later for the good of the majority and the economy as a whole. The government will cause more damage than a hundred MFGobal-Madoff-Peregrine’s put together.
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You are right about Glass-Sreagall; but it would sepsrste invesment banking from deposit banking and if an investment bank goes ubder it is not my money. I do like your small and smart thought, John. Thousand page laws and tousand page regulations are not the answer
Flush Dodd-Frank absolutely. My question is who would do the regulating? Congress can’t even regulate itself!
The Greedy Bandits are guarding the hen house! Isn’t this more of a morality issue when your playing with other peoples money?
PLU from SSF
They hide behind the limited liability of corporations. Maybe that needs to change.
Dodd-Frank has to go. Financial institutions are forced to spend too much time and too much money on way too much useless regulation. Protecting consumers? I think not.
The consumer and taxoayer always pay. There are ways to change that if we have the will.
When news broke of a 2 billion dollar trading loss by JP Morgan, much of the financial world was absolutely stunned. But the truth is that this is just the beginning. This is just a very small preview of what is going to happen when we see the collapse of the worldwide derivatives market. When most Americans think of Wall Street, they think of a bunch of stuffy bankers trading stocks and bonds. But over the past couple of decades it has evolved into much more than that. Today, Wall Street is the biggest casino in the entire world. When the “ too big to fail ” banks make good bets, they can make a lot of money. When they make bad bets, they can lose a lot of money, and that is exactly what just happened to JP Morgan. Their Chief Investment Office made a series of trades which turned out horribly, and it resulted in a loss of over 2 billion dollars over the past 40 days. But 2 billion dollars is small potatoes compared to the vast size of the global derivatives market. It has been estimated that the the notional value of all the derivatives in the world is somewhere between 600 trillion dollars and 1.5 quadrillion dollars. Nobody really knows the real amount, but when this derivatives bubble finally bursts there is not going to be nearly enough money on the entire planet to fix things.
This story was first published on Oct. 26, 2008. It was updated on Aug. 27, 2009.Anyone with more than a casual interest in why their 401(k) has tanked over the past year knows that it’s because of the global credit crisis. It was triggered by the collapse of the housing market in the United States and magnified worldwide by the sale of complicated investments that Warren Buffett once labeled financial weapons of mass destruction. They are called credit derivatives or credit default swaps.As correspondent Steve Kroft first reported last fall, they are essentially side bets on the performance of the U.S. mortgage markets and some of the biggest financial institutions in the world – a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages. It would have been illegal during most of the 20th century under the gaming laws, but in 2000, Congress gave Wall Street an exemption and it has turned out to be a very bad idea.
“Wall Street just found a way to take advantage of the bubble ”
Yes, that is exactly what happened. My next door neighbor, a Democrat, stressed that the financial crash was the fault of the cooked people in the business. He does not understand that those crooks are always there, and they are the same people who guard and invest his money.
Wall Street is not capable of self-regulation. I was a stock broker for a short while, and it is my observation that, taken as a whole, the financial industry is a scam, and is geared to separate you from your money. Brokers, advisers, and bankers are not there to make you wealthy. There are there to get wealthy from you money.
Nobody is on your side, and the Federal Government has NEVER done its job in regulating those punks. The heads of Goldman Sachs, Leyman Bros., Merryll Lynch (before merger) should all be in prison. So, what do we get? We get someone like Bernie Madoff to serve as the sacrificial goat so the rest of the thieves can continue their hundred million dollar careers.
That’s Wall Street, and that’s our government at work for us, the poor, common citizen.
Thanks for the great comment, Bob. Casinos were not built so gamblers could win, were they?
I’m tired of Wall Street and the super big corps hiding behind the label of an “I earned it businessman”. These people don’t really “work” in my book. They produce nothing and add nothing but knucklehead talk. As I’ve been going over at my place, it was these big banks that funded the Soviet Union (JP Morgan thru its subsidiary Guaranty Trust), GE’s Swope Plan became the basis for how the entitlement net was laid, and IG Farben and other’s funneled money to Hitler’s campaign, the American directors not going to jail. The Fed, the IRS, the foundations, the panic of 1906, all sorts of thing were orchestrated (just look it up) by organized money for the express purpose of remaking society for their benefit. Then they act like their just businessmen. No ma and pa who run the diner are the REAL business people, these banksters are just actors and thieves. They don’t have to compete in capitalism anymore, because now they have achieved monopoly and are now fixing to charge America a lot of rent for existing in their space.
When news broke of a 2 billion dollar trading loss by JP Morgan, much of the financial world was absolutely stunned. But the truth is that this is just the beginning. This is just a very small preview of what is going to happen when we see the collapse of the worldwide derivatives market. When most Americans think of Wall Street, they think of a bunch of stuffy bankers trading stocks and bonds. But over the past couple of decades it has evolved into much more than that. Today, Wall Street is the biggest casino in the entire world. When the “ too big to fail ” banks make good bets, they can make a lot of money. When they make bad bets, they can lose a lot of money, and that is exactly what just happened to JP Morgan. Their Chief Investment Office made a series of trades which turned out horribly, and it resulted in a loss of over 2 billion dollars over the past 40 days. But 2 billion dollars is small potatoes compared to the vast size of the global derivatives market. It has been estimated that the the notional value of all the derivatives in the world is somewhere between 600 trillion dollars and 1.5 quadrillion dollars. Nobody really knows the real amount, but when this derivatives bubble finally bursts there is not going to be nearly enough money on the entire planet to fix things.