Are We There Yet?

An Opinion Piece.

I started writing about the subprime crisis back before it was a crisis. I was warning of taxpayer bailouts on the way and pointing fingers at those I believe to be responsible for the massive increase in household debt over the past decade. Since last September, however, I have stepped back because we ended up in a true financial crisis – one that could have seen the shut down of credit cards and ATM machines across the country. In such circumstances I give the authorities a pass as I do not want to find out first hand what happens when the grocery store shelves are bare (I do not own a gun). At this point, however, I think we have averted the total collapse scenario. I am not bullish on the economy or the stock market just yet, but I am no longer worried that my access to cash will be shut off. If we have indeed averted the nightmare and are now on the road to a long recovery period, then it is time to go back to asking the tough questions about how we got here and what to do about it. I think we have arrived at this point and it is time to start holding people and institutions responsible for what has transpired.

I am very angry with some of the back door dealings and subversions that have occurred in connection with bailing out financial institutions at the expense of United States taxpayers. From Paulson's "no review" $700 billion bank scheme to revelations regarding the disposition of taxpayer funds through AIG, the manner in which this situation continues to be handled is, I believe, a disgrace. For example, when I hear Goldman Sachs tell us that the $12.9 billion or so it received from AIG through taxpayer funds was unnecessary because it was properly hedged against AIG risk I automatically think, "well, OK then, give it back." So where is it? The arrogance and insensitivity to the general public is obscene. What we have had is a devastating bout of bad behavior by our financial and political institutions. What we need now is to find those responsible, hold them to account, recover the proceeds of their ill-gotten gains the best we can, and prevent this from happening again. This is in addition to shutting down the insolvent institutions before they create even more bad loans in their attempts to become profitable. So far I don't see any of that happening. What I do see is Citibank charging friends of mine 30% interest on their credit cards while at the same time this institution has access to virtually free money from the Federal Funds market and infusions from taxpayers on giveaway terms. This is too much for me to reconcile even with the current financial crisis and the pressure on the banking system.

There are several things that currently trouble me a great deal. The back-door contribution of taxpayer funds through the toxic asset purchase program to the very financial institutions that perpetrated this massive destruction of household and financial sector balance sheets for private gain bothers me. The very fact that Timothy Geithner is Treasury Secretary after his tenure at the New York Fed during the creation of this crisis (not to mention his tax "issue") is troubling. The push to concentrate regulatory power into the hands of the Federal Reserve, the very institution responsible for overseeing our financial system during the drive to leverage up the United States household and financial sectors for the profits of the financial sector (and, more directly, those individuals within it) seems out of touch. The "modification" of mark-to-market rules is shady. The blatant conflicts of interest when the former and, as suggested by Matt Taibbi, the current CEO of Goldman Sachs construct a taxpayer bailout for AIG that provides the most financial gain to - Goldman Sachs - is astounding. The refusal to take the steps we ourselves tell other countries they need to take in times of financial crisis is embarrassing. (For a good read on this point see This article by Simon Johnson in The Atlantic.) These are momentous events, and though I detect the populist rage (for example, this piece by Matt Taibbi in The Rolling Stone) it seems to me that we as a population are at risk of letting this entire affair pass us by without holding anyone accountable or truly learning the lessons we need to from it.

I think we are there – at the point where we begin to take seriously the need to recall the army of finance, accounting, and legal experts who are compensated with outsized rewards to find ways they and their clients can circumvent the regulatory schemes put into place to protect us from this very problem. Those brilliant thinkers who can conceptualize the gray areas between legislative and regulatory words and intent to find avenues of attack for profitable private gain without concern for the impact on the population at large – the public risk. We also need to cleanse the system of the influence money, in all of its cancerous forms, that results in politicians carrying the torch for a favored industry. This will require at least two steps. Step one is to find out exactly what happened, who knew what when, and hold those who behaved recklessly to account for their actions. It is easy to find out who they are – just follow the money while ignoring the cries of "witch hunt" and "class warfare" that will be shouted in protest by those responsible (and their shills). Step two is develop a set of regulatory rules and enforcement that are principals based where actions that are contrary to the spirit of the regulatory framework bring swift consequences. The regulatory changes must address both the finance industry and the political process to remove the incentives for reckless legislation and deregulation. For example, if you are a business that borrows short term funds and invests those funds in longer term assets for profit, you are subject to regulation whether you have a bank charter or not. If you provide any assurance against the risk of loss you are an insurance company. If you engage in any of these activities without registering to be regulated you are promptly shut down, fined, and prosecuted. Once registered you are subject to capital requirements and oversight. Ultimately, these are the things that need to be done.

The more we allow taxpayer rescue of financial institutions without holding those institutions to account from this point forward, the more we are doing a disservice for the American taxpayer, and the more likely it is that we will pass through this crisis into another one in the future. I believe we have arrived at the point in time when we should be swiftly moving from crisis aversion to long-term cleanup – lets get started. I hope the Obama administration, as infiltrated as it already is by insiders from Wall Street, steps up to the plate and begins to take charge. The approach to the auto industry last week was a refreshing wake up call that there is a limit to what taxpayers will stand for. At the same time it highlights the enormous benefits bestowed on the financial sector even after such monumental failures, and the concurrent lack of accountability for the devastation on our economic lives. I want accountability and I want it at the institutional and individual levels. I want a complete investigation by qualified independent investigators. I feel that until we demand it we are no better than those who should be held accountable because we are being complicit.

*A note on my belief that there are specific people to be held accountable:

I believe that any seasoned lender understands that you cannot turn a package of bad loans to people with no income into an AAA security through "structuring." At some level, people had knowledge that what was going on was bound to collapse at some point. Perhaps the analyst didn’t, perhaps the loan officer didn’t, but at some level people knew what was transpiring. I don’t really care if they had insurance from AIG, they should have demanded to see AIG’s total exposure and taken that into account. What happened represents, at the very least, reckless activity and I believe could be characterized as fraud in certain circumstances. The facts revealed in the very incomplete "investigation" into the rating agencies participation in this mess revealed this to be true, and I would bet that any true investigation into the behavior of the financial institutions involved would result in similar findings. This Bill Moyers interview of William Black provides an interesting perspective on whether or not fraud was actually involved. In any case, whether what happened meets the legal definition of fraud is something we should be investigating and, if the answer is no, then we probably need a new definition or standard to protect us from this behavior in the future.

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