Monday, April 26, 2010

The U.S. financial system needs reform now

The Washington Post reported today that the majority of people in the United States back two of the three main parts of the financial reform legislation that the Senate will vote on this week. The two major pieces people support are greater government oversight of consumer lending and, as significant; they support the creation of a fund to be paid into by companies that will cover the cost of shutting down failed institutions, which closures present a risk to the economy. Incomprehensibly, at least to me, is that when it comes to proposed reform and oversight of the buying, selling, and trading of derivatives only 43% support it, while 41% oppose it, with the remaining 16% expressing no opinion. Frankly, given that even people who buy and sell derivatives don't understand them, I am surprised that only 16% essentially did not know.

I really believe if the Obama Administration had led with this much needed reform, which really is more urgent than health care reform, the first year of his presidency would not have been such a ringing catastrophe, at least on the domestic policy front.

Fareed Zakaria, who can always be relied upon for intelligent and dispassionate commentary, also writing in the Washington Post today about the allegations made in the S.E.C.’s recent lawsuit against Goldman Sachs, leaves me feeling ambivalent, that is, both convicted and vindicated. I have to say, I feel more vindicated than convicted. I admit that my posts on Goldman Sachs have been passionate responses to an organization that I feel embodies all that is wrong with our current financial system, one that has steadfastly refused to learn those lessons, as the tidal effects of the still unfolding Greek debacle continue to be felt throughout the E.U. monetary union and beyond amply demonstrates. I would write about Lehman Brothers and Bear Stearns, too, except that, largely due to behind-the-scenes manipulations by the likes of Hammerin’ Hank Paulson and other Goldman insiders, who control the levers of governmental financial regulation and policy-making, they no longer exist. I had friends who worked on Wall Street at Bear, who predicted the collapse to me long before it happened. Things were, indeed, rotten in New Amsterdam for a long time.

Returning to Goldman Sachs, Senator Carl Levin, commenting on e-mails from senior executives at Goldman Sachs from 2007, detailed over the weekend by London's Daily Mail, including e-missives from our friend Lloyd Blankfein, pretty much hits the nail on the head: "Banks such as Goldman Sachs...bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients." Now that the heat is on, as the New York Times documents, Mr. Blankfein is singing a different tune, claiming the Goldman did not bet against their investors. All I can say is "See you court" and hope the porn-loving regulators at the S.E.C. weren't swept away in on-line fantasies, or some such thing, while they should've been preparing the people's case.


As I have stated repeatedly, I am not interested in the legal aspects of the S.E.C. case against Goldman Sachs, like Zakaria, I understand that "Wall Street practices [that] seem dodgy, or unethical," are not necessarily illegal. I, too, value a "system of governance… characterized by fair play and equal justice -- even for people making $10 million bonuses." I am interested in the moral and ethical dimensions because of the huge impact of these shenanigans on the lives of all of us. I very much like that Mr. Zakaria points to Robert J. Samuelson’s argument, which amounts to stating succinctly the argument I have been making for well over a year, namely "whether or not Goldman did anything illegal, this kind of casino gambling should be more tightly controlled". I am even toying with an argument that derivative-like securities be outlawed altogether because investing should not be the same as a weekend in Vegas or Atlantic City. I say that because, like many, I work too hard to gamble my money (gambling being one bad habit I never picked up). I largely agree with the financial reform legislation now before the Senate, which, according to Sen. Shelby, the Republicans unanimously oppose.

Please don’t get me wrong, I am alright, more than alright, with a negotiated solution that is truly bi-partisan, as long as it isn’t watered down to the point where it amounts to no serious reform at all. I will admit this is where I begin to suspect that Republicans are looking out for those making $10 million bonuses more than the vast majority of their constituents who do not and who are the victims of schemes that result in this kind of profit-taking, not necessarily waving the bloody shirt, but the shirt stained with something more reminescent of the Clinton presidency, given the Grassley/Issa leak late last week.

Our current regulatory system was designed for and around what Zakaria dubs "the old Wall Street," which was characterized by "firms [that] were once partnerships in which the managers were betting with their own money and served as trusted advisers to clients. The new companies are big players in the markets and have subordinated their advisory functions." As the S.E.C. lawsuit against Goldman Sachs alleges, they now bet with your money and mine, even playing us for suckers by getting us to take the bad bet and betting against us. Their advisory function has, indeed, been subordinated on the new Wall Street and is characterized by "wildly skewed" incentives and compensation, which values "short-term profits and risk-taking" over "long-term strength." Whether we care to attend to it or not, the immorality engendered and allowed by our current system and the gross injustices committed as a result is a major moral and ethical issue of our time.

Christos Anesti

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