Streetwise
Lauren Rudd
Sunday, November
2,
2008
Why We Are Where We Are
(Note:
Several papers removed a sentence. The uncut version appears below with the
disputed sentence underlined. - Lauren Rudd)
"Those of us who have looked to the self-interest of
lending institutions to protect shareholders' equity, myself included, are in a
state of shocked disbelief." Alan Greenspan, former Chairman of the Federal
Reserve.
When pressed by a Congressional hearing recently, Greenspan
admitted that he was "partially" wrong in his conviction that some trading
instruments, specifically credit default swaps, did not need oversight.
Let’s not forget that while Chairman, Greenspan also said
that hedge funds diversify risk and that slowing their growth would be
detrimental. I ask you, detrimental to whom? Was Greenspan naïve and politically
driven; or was he simply unable to intellectually grasp the gravity of his job.
Regardless, his decision to maintain low interest rates and unfettered liquidity
was wrong.
The situation is considerably different when you look at
Christopher Cox, Chairman of the Securities and Exchange Commission. Here you
have a case of undeniable political deference to Wall Street. However, Cox was a
latecomer to a party that began on April 28, 2004, led by then SEC chairman
William Donaldson, also a Wall Street veteran.
On that date the SEC met to consider an urgent plea by the
large investment banks for an exemption from regulations limiting the amount of
debt they could take on. The exemption would unshackle billions of dollars in
reserves held as a cushion against losses. After 55 minutes of discussion, the
request was approved.
Key among the five investment banks was Goldman Sachs, headed
then by none other than Henry M. Paulson Jr., who, two years later, would become
Secretary of the Treasury and lead a bailout of the same five firms, using
taxpayer money.
As the disastrous events of the past year began to unfold,
Cox announced that, “We have a good deal of comfort about the capital cushions
at these firms.” Yet, for the 18 months prior the SEC had made no effort to
inspect or analyze the underpinnings of those five firms, which together
controlled more than $4 trillion dollars of assets.
So why do I regurgitate this unpleasant stream of historical
events? In part to answer some rude and deprecating comments resulting from last
week’s column. Shooting the messenger accomplishes
nothing, except maybe in that bastion of political freedom, fashion and home
remodeling affectionately known as Alaska, where shooting the defenseless
appears to be a statewide pastime.
As far back as a year ago, I warned of the financial train
wreck that would occur when the Street’s house of cards toppled from the long
overdue requirement of marking-to-market Level 3 assets. In the past, those
assets were valued using the holder’s own assumptions, laughingly referred to on
Wall Street as “mark-to-make-believe.” Now, intense lobbying is taking place to
remove that requirement, led by, you guessed it, the banking industry.
"We never legislate accounting practices," Rep. Barney Frank
said, “But there are modifications that we are looking at.” To use a Halloween
analogy, the result of watering down mark-to-market was stated well in
Shakespeare’s Macbeth, “Double, double toil and trouble; Fire burn, and caldron
bubble...for a charm of powerful trouble.”
With home foreclosures skyrocketing, nest eggs crushed and
unemployment rampant, investors are progressing from discouragement to abject
panic. That is both unfortunate and wrong. I have been dealing with Wall Street
for over 40 years and I am just as enthusiastic about investing in stocks today
as I was when I first started.
However and here is the messenger part, without exacting and enforced
regulation, Wall Street will not act in the public’s best interest. To think
otherwise is not naïve, it is just plain unintelligent. Washington’s
deregulatory policies have enriched Wall Street and the corporate elite at an
unfathomable cost to Main Street.
