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« Dominique Strauss-Kahn, Tim Geithner And The IMF | Main | CNN's Jack Cafferty: GE Moves $14 Billion Per Year X-Ray Business To China, And They Still Don't Pay Any U.S. Taxes »
Thursday
Jul282011

Whitewash On Wall Street: How Henry Paulson Created The Financial Crisis That Brought Down The World

A Summer flashback.

Regular Bail readers know my thoughts on Krugman's god-forsaken love of useless government stimulus, and his hypocrisy on deficits - they only matter to him when the GOP runs the show - newsflash for Krugman - deficits always matter - but, he's been consistent and correct on the Wall Street heist, and so we post his latest op-ed.

#

Reprinted with permission.

Source - NYT

Wall Street Whitewash

By Paul Krugman

When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated.

Which brings me to the case of the collapsing crisis commission.

The bipartisan Financial Crisis Inquiry Commission was established by law to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The hope was that it would be a modern version of the Pecora investigation of the 1930s, which documented Wall Street abuses and helped pave the way for financial reform.

Instead, however, the commission has broken down along partisan lines, unable to agree on even the most basic points.

It’s not as if the story of the crisis is particularly obscure. First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.

Then the bubble burst, with hugely disruptive consequences. It turned out that Wall Street had created a web of interconnection nobody understood, so that the failure of Lehman Brothers, a medium-size investment bank, could threaten to take down the whole world financial system.

It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.  Last week, reports Shahien Nasiripour of The Huffington Post, all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”

When Democratic members refused to go along with this insistence that the story of Hamlet be told without the prince, the Republicans went ahead and issued their own report, which did, indeed, avoid using any of the banned terms.

In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac, the government-sponsored loan-guarantee agencies — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.

It’s hard to overstate how wrongheaded all of this is. For one thing, as I’ve already noted, the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble.

Beyond that, the timing shows that private players weren’t suckered into a government-created bubble. It was the other way around. During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.

But the G.O.P. commissioners are just doing their job, which is to sustain the conservative narrative. And a narrative that absolves the banks of any wrongdoing, that places all the blame on meddling politicians, is especially important now that Republicans are about to take over the House.

Last week, Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

He later tried to walk the remark back, but there’s no question that he and his colleagues will do everything they can to block effective regulation of the people and institutions responsible for the economic nightmare of recent years. So they need a cover story saying that it was all the government’s fault.

In the end, those of us who expected the crisis to provide a teachable moment were right, but not in the way we expected. Never mind relearning the case for bank regulation; what we learned, instead, is what happens when an ideology backed by vast wealth and immense power confronts inconvenient facts. And the answer is, the facts lose.

---

Ratigan details Paulson's rarely mentioned role in the crisis.

Awesome short clip.  Runs 3 minutes.

Make sure to read the story below from the NY Times on Henry Paulson's role in the SEC rule change (2004) that allowed leverage to expand from 12:1 to 100:1 for only the 5 largest investment banks. 

Besides Ratigan's occasional outburst, it is still the event most ignored by CNBC and the rest of the mainstream news media.

From the New York Times:

What was the most relevant factor in the blow-up.

Leverage.

Until 2004 U.S. investment banks had a leverage limit of 12:1.  After Paulson led the multi-year effort to sway the SEC to drop these rules entirely, allowing 5 banks to utilize unlimited leverage, all 5 became effectively insolvent within 4 years.

It's the most important piece to understanding how this banking crisis was so devastating compared to previous blow-ups, and why it was so widespread -- European banks were (and remain) even more leveraged than our own.

And, it's the easiest part to fix.  Just turn the rule back to pre-2004.

UPDATE - After some research, I confirmed that Dodd-Frank made no changes with regard to leverage; there are still no limits and the issue has been consigned to the Federal Reserve for further study.  

Nice work.  They blew up the world, and still avoided any adjustments to their leverage-based business models.

 

Related reading...

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Watch this one.  At true must see.

Ratigan on Paulson and leverage.

 

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Reader Comments (16)

2 injured in bomb blasts at Swiss, Chilean embassies in Rome

http://www.latimes.com/news/nationworld/world/la-fg-italy-blasts-20101224,0,5652310.story
Dec 23, 2010 at 3:54 PM | Registered CommenterDailyBail
Dec 23, 2010 at 3:55 PM | Registered CommenterDailyBail
Dec 23, 2010 at 3:56 PM | Registered CommenterDailyBail
Obama Family Vacation Runs Into Troubled Waters: Again

http://politics.blogs.foxnews.com/2010/12/23/obama-family-vacation-runs-troubled-waters-again#ixzz18yEajnnD

Hawaii has been plagued with heavy rains recently, and the Oahu village of Kailua has been forced to release untreated sewage and agricultural runoff into Kailua Bay and the beaches around the Obamas' rental home. County officials have posted signs telling tourists to stay out of the water but many Hawaiian visitors are going in for a Christmas dip anyway.

But the first family's issues with dirty water began last summer.
Dec 23, 2010 at 4:00 PM | Registered CommenterDailyBail
Dec 23, 2010 at 4:00 PM | Registered CommenterDailyBail
Dec 23, 2010 at 4:01 PM | Registered CommenterDailyBail
Dec 23, 2010 at 4:25 PM | Unregistered Commenterjohn
Krugman? You're kidding!

You want the real STORY on Paulson? The late Christopher Story has been investigating his shennanigans for many years..
http://www.worldreports.org/news
Dec 23, 2010 at 10:37 PM | Unregistered CommenterD. L.
Dec 24, 2010 at 8:13 AM | Unregistered Commenterjohn
Krugman? You're kidding!

---

I explained my thoughts on krugman at the top of the story......
Dec 24, 2010 at 11:55 AM | Registered CommenterDailyBail
IBM Expects to See Holographic Phone Calls, Air-Powered Batteries by 2015

http://www.bloomberg.com/news/2010-12-23/ibm-predicts-holographic-calls-air-breathing-batteries-by-2015.html
Dec 24, 2010 at 12:00 PM | Registered CommenterDailyBail
« CEA Chair Christina Romer: We'll Do Whatever It Takes To Help The Economy (Anti-Keynesian Stimulus Rant Included) »

http://dailybail.com/home/cea-chair-christina-romer-well-do-whatever-it-takes-to-help.html

On Krugman and Keynes...
Dec 24, 2010 at 12:08 PM | Registered CommenterDailyBail
You might want to add the Business Week cover story from June 12, 2006 to your Hank Paulson collection. Destined to be a classic, it was called "Mr. Risk Goes to Washington: Hank Paulson's profound understanding of risk and reward makes him the perfect pick for the Treasury".

A snippet for flavor:

The subject has become an obsession at Goldman: how to find profitable risks, how to control and monitor them, and how to avoid the catastrophic missteps that can bring down whole companies. That means taking on more debt: $100 billion in long-term debt in 2005, compared with about $20 billion in 1999. It means placing big bets on all sorts of exotic derivatives and other securities. And it means holding almost $50 billion in the piggy bank, enough cash and liquid securities to keep the firm going in the event of a financial crisis.
Dec 24, 2010 at 4:13 PM | Unregistered CommenterG Street
@g street...

i found the link...thanks for the heads up...

http://www.businessweek.com/magazine/content/06_24/b3988001.htm

Mr. Risk Goes to Washington
Dec 27, 2010 at 10:54 AM | Registered CommenterDailyBail
Pirates, ships of state, jolly roger flags, free masons, Teutonic crosses, the vatican, City of London, central bankers, credit, no more slaves, gotta get it somewhere.
Jul 29, 2011 at 1:27 AM | Unregistered CommenterHoward T. Lewis III
Ever notice how shit floats?
Jul 29, 2011 at 4:49 AM | Unregistered CommenterS. Gompers

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