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?”
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?