Financial Services Reform

Only last week it looked like we were on the verge of re-regulating the industry. Then Senator Byrd dies; political dynamics of the senate change; Republicans shift their votes and the “super-majority” is lost. Is this any way to run a government? We’re back to square one.

Check this scenario:

Joe Thompson buys an old house---a fixer-upper, really a “tear-downer”, for $85,000. He hires an unscrupulous contractor who for $50,000 gives the place a good “cosmetic” facelift. Next he hires a property assessor, known to be somewhat less than thorough. This gleaming, remodeled house is “appraised” at a cool $275,000. Joe can’t really sell the place because any decent inspector would look beneath the façade; so he takes up residence and two months later there’s a mysterious fire that burns the place to the ground. The insurance company pays off and Joe doubles his “investment” until someone in the fire department asks too many questions.

So what does Joe end up with, and what do we call this? We call it arson and fraud; Joe gets 8 to 20, with parole after 5. Joe defrauded an insurance company.

Scenario 2:

McNulty and Smith run a commercial bank and control pension funds for large manufacturing firms. With assets of nine billion dollars, and real estate on a run, they sell mortgages to anyone who comes along: “You can’t lose money on real estate; Just sign here for the loan---don’t worry about paying it off; you can sell the house in a year and make a big profit.” M&S makes a cool commission on each of the mortgage transactions.

Then they hire an unscrupulous rating agency, Moodys, Standard & Poors, Fitches. They pay one of these “highly-respected” companies to rate these securities AAA, bundle large quantities into “Mortgage-based Securities” and sell them (“dispose” of them) on the international market. Oh, they get a nice commission on that sale also.

This all looks like a pretty smooth operation. But it gets better. The executive board at M&S knows very well that these loans aren’t worth the paper they’re written on. So they “short” the securities, or the firms who bought them, sit back and wait. The inevitable occurs: the bottom falls out of the real estate market; values tumble; M&S complete their transactions, buying back the investments at a small fraction of what they sold them for.

Meanwhile, millions of struggling “home-owners” all over the country are thrown into financial turmoil. “Buying into the American Dream” has become a nightmare. Unsuspecting pensioners all over the world lose their life savings.

So what does M&S get for this piece of work and what do we call it? We call it “banking” and the managers at M&S become wealthy beyond the dreams of Avarice. The financial losses of millions of little people end up lining the pockets and mansions of these few fat-cats. We also call it “Shorting the American dream.”

No, my friends, this is not a “hypothetical” scenario. This is the way our bankers operate. Look into the report on Magnetar’s operation that hit the news in the past month.

Is this “legal?” Yes. Who pays for the losses of the big banks? We add that to the national debt. Can’t we put a stop to this? Apparently not. For the last year, the industry has been pouring a million dollars a day(!) into lobbying congress to keep the door open for this kind of scheme. And the Republican Party is not going to sit back and let the government impose new rules on the industry without a fight. You can bet that enough Democratic legislators are also scooping up chunks of this cash to keep them from moving the Rep’s aside.

Write to your congressmen; look into their voting.