Oh dear, our mistake, so sorry

Oct 4th, 2008 | By
Category: Notes and Comment Blog

There’s been a lot of buzz about the New York Times article on a meeting of the SEC in 2004 that apparently did a lot to cause this little difficulty (you know, banks flopping, 700 billion public dollars tossed away in hopes of mollifying Wall Street, that little difficulty). It’s rather irritating to read.

[T]he 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 exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments.

And they got what they wanted, and it all went blooey, and now we have to pay for it. Money that could have gone for a national health service or education will be pissed away on toxic debts. It’s regrettable.

Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments. 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.

Ah – the very guy who demanded the 700 billion with no questions asked, no supervision, no amendments, and no delay. Interesting. He helped cause an economic meltdown, and now he’s landed us with a 700 billion dollar debt. And yet some commentators were surprised at the level of anger among the Amurican people. Because – why? We should think this is a success story?

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.

And – whaddya know – they didn’t do a very good job. And the SEC didn’t do its job either. So – 700 billion thrown away in an afternoon. Oh well! Plenty more where that came from.

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. “It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”

Ahhhhhh yes – so they don’t! And there’s quite a well-understood reason for that, which can be summed up in the vulgar phrase about the fox guarding the henhouse. They don’t work because the people in charge of the voluntary programs have a vested interest in not making them work. It’s really quite simple. Too bad it took a total collapse of the global economy that we’ll be paying for for generations to drive that lesson home.

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