Brumar, your understanding in this area is not complete. There simply was no effective regulation in these markets, meaning there were no regulatory bodies doing their due diligence and enforcing rules. Even Greenspan warned about the growth in derivatives and their blackbox nature. One classic example of this is what the credit rating agencies did with bond derivative packages. One common ploy was to pull out the high-risk bond tranch and repackage it seeded with some high quality bonds in there. In the new package, the ratings agency would then re-rate the whole thing with all the normal tranches, despite the fact that the new package was riddled with low-quality, high-risk bonds that had much higher risk of default. Everyone continued to assume a 5% default rate, when in fact, the default rate was much much higher.
So who was monitoring the credit agencies to make sure they did their due diligence? This was a classic case of the industry monitoring itself, with disastrous results. Phil Gramm was one of the people who was behind the lack of monitoring of derivatives markets. The SEC needs to expand its mandate to monitor and enforce common sense rules here.
Another example is the repeal of Glass-Steagel. Because of this, commercial and investment banks no longer had to remain separate. That means that the mortgage loan sourcer doesn't worry about due diligence, because they are in the business of reselling the loan to someone else, instead of holding the loan to maturity. In the financial implosion that just occurred, wealth was created in a ponzi scheme of everyone hoping to resell the mortgage packages to someone else. Well, everyone did and in typical ponzi fashion, the last one holding the package, got left with the toxic assets, while everyone else made money. That last person was our government, which means you and me.
BTW, my brother is a partner at a law firm and he has many clients in the hedge fund business. I get an earful from him on all of the lax or non-existent regulation in this industry. And he should know. He's in this business. His firm is setting up a whole new division to recommend regulation to solve these problems.
So when you say it is a lie that deregulation is why the free markets failed, you are simply incorrect. The markets didn't really fail. The market environment we created with our laws and lack of effective and enforceable regulation, simply played out to its logical conclusion. If we don't want a replay of this, then we need to create a new financial environment where this outcome is not possible. That is going to mean increased, effective and enforceable regulation. |
