Sunday, April 19, 2009

Adolescent Boys Don't Like Rules

Just a quick note on a blog entry by Andrew Sorkin in the New York Times of April 17, 2009, following my last post:  Liddy has a sizable stake in Goldman Sachs, even though he is doing his AIG job for a salary of $1 per year.  The stench of conflict of interest is becoming unbearable.

Yesterday, I watched a rerun of The Panic of 2008, a forum held at George Washington University on April 4, 2009, on C-Span.  Its subtitle was "Causes, Consequences and Proposals for Reform: Roundtable on the Significance of the Panic."

It was painful to watch Dennis Berman, Money & Finance Deputy Bureau Chief of the Wall Street Journal, hem and haw around the need for regulation.  He began by referencing an article in The Atlantic issue of May 2009, by Simon Johnson, former Chief Economist of the IMF, called The Quiet Coup, which he said, explained that Wall Street in a quiet coup has taken over the reigns of government.  In his very next sentence, he redacted himself by saying "Now that doesn't mean that a sharp turn to regulation is necessarily the answer."  I was wondering to myself, "Is this man blind, or is he just saying it to sound intelligent and balanced?"

The idea that Wall Street firms would engage in socially responsible financial behavior without regulation has been proven false repeatedly as I outlined in my post of March 24th.  Wall Street firms are carnivorous, they are apex predators like sharks in the economic food chain.  Left unchecked, they are likely to use every legalistic maneuver to make money, or if not, at least create the illusion that they are making money, so that their stock prices go up.  When they run afoul of the law, as they have, they settle out-of-court, without admitting or denying wrongdoing.  We have indeed devolved from a nation of respectable conservative businesses to one of opportunistic operators.   So, yes, Wall Street firms are like adolescent boys.  They don't want to be stifled by rules.  Government needs to be a parent and ground them for some time.

When Jamie Dimon, CEO of JPMorgan Chase Bank, and Lloyd Blankfein, CEO of Goldman Sachs, say they would like to return the TARP monies loaned them by the government, they are counting on making the public believe that by doing so, they will have annulled their obligations to the government.  That is far from the truth.  A week after Lehman Brothers collapsed, Goldman Sachs and Morgan Stanley turned themselves into bank holding companies (cf., this WSJ article) with some alacrity, so that they would be more easily able to be acquired, merge with or acquire smaller banks with FDIC-insured deposits.  It also potentially allows them to avoid using mark-to-market accounting, and instead classify assets as "held for investment" as banks do.  Even if the TARP funds were returned, bank holding companies receive the backing of the FDIC, which relies on using tax payer monies as collateral.  So, while these cowboys posture about how they don't need the government, you, the public, should know that it's a red herring.  I'm reminded of Immanuel Kant's famous quotation, "Out of the crooked timber of humanity, nothing straight was ever made."

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