"Knowledge will forever govern ignorance"

--James Madison--

"The real division is not between conservatives and revolutionaries, but between authoritarians and libertarians"

--George Orwell--

For Once, Don't Blame The Democrats

First posted at The Smirking Chimp, September 23, 2008.

The current economic crisis is not the fault of Democrats who helped pass the Gramm-Leach-Billey act (which actually had the redeeming feature of imposing privacy rules on the financial industry). It's not Bill Clinton's fault for signing it. It's not the fault of Congress at all. This is not a matter of adequate laws and regulations not being in place.
It is, as far as government intervention (or lack thereof) goes, strictly George Bush's mess.
It's not the fault of people who borrowed money that they couldn't repay. It's not even the fault of the lenders who made the bad loans. Even the Fed is largely blameless, although fingers can be pointed at the Fed for making money too cheap, and lenders for making irresponsible loans.
No, the crux of the problem seems to be lack of enforcement of existing laws and regulations, and the thieves who took advantage of the situation.

I'm just a lowly financial consultant, and won't pretend to know all of the ins and outs of derivatives contracts that the best and brightest in my field don't even understand. These securities were designed to be opaque enough to fool even the most seasoned investment bankers and fund managers.
But the gist of most of them is this--a bank bundles loans into a big package. The income stream (the interest payments on the loans) is sold in the form of derivative contracts. The underlying assets (the collateral of the loans) is kept by the bank, and perhaps sold to a different bank.
On the surface, it looks much like a zero-coupon bond, where one investor may buy the bond itself, and another investor buys the interest payments. But there's a big difference. If a bond defaults, bondholders have first dibs on the assets of the company that sold the bonds. With derivatives contracts, there is no recourse if the income stream dries up, or is less than was promised.
Why? Because the bank kept the collateral, and didn't pledge it as security to those who bought the interest payments.
There is little difference between this, and selling stock in a non-existent company. Except that, if I were to sell imaginary stock, or partnership interests in a partnership that didn't actually have any business or investment activity, that would be called fraud. One complaint from one ripped-off investor, and I would have the SEC, FINRA, the IRS, the Justice Dept and my state attorney general's office waiting in line to slap me around. I would most likely go to prison, lose all of my professional licenses for life, and have unpayable fines levied against me.
But I'm not Merrill Lynch, either.
When Bill Clinton left office, there were very few derivatives contracts on the books (how much? who knows? There's no way to track these things, since they're not registered securities). Probably less than $100 billion worth worldwide. There were also several ongoing SEC investigations into investment banks that were underwriting and selling these literally worthless pieces of paper.
Then Dubya comes along, and suddenly, nobody's minding the candy store anymore. The mice started playing more than ever. Next thing you know, there are untold trillions of dollars tied up in these things. Far more money than the underlying assets were ever worth.
This is securities fraud. It's already illegal, as it has been for almost the entire history of this country. But nobody's prosecuting it. Most SEC investigators have been shunted off to the black hole of the Enron investigation (yes, still...). The Justice Department only investigates allegations made against low-level players. FINRA can only regulate retail sales of securities.
Much could have, and should have, been done about this over the past 5-7 years. A bunch of people should already be in jail. People who, even now, face no consequences for their actions.
This isn't Congress' fault.
This isn't Bill Clinton's fault.
This is definitely not the fault of the Democratic Party.
The blame rests squarely on the current holder of the executive office, George Bush, and the Republican Party insiders who demanded that oversight be lifted almost completely.