naked capitalism

Anonymous says:

I’m largely not sympathetic to political/partisan accusations in the context of this crisis, and god knows there’ve been plenty of those going around. But I will say, from what I have seen/heard, Christopher Cox’s entire team deserve to be at a special level of hell for their roles in this debacle.

aw70 says:

Right, as if it was any sort of surprise that, in addition to all the other ingredients to this disaster, the SEC also screwed up royally. That sort of thing is what one would expect from the Bush administration: a hand-picked selection of people whose character makes them totally unfit for any sort of office, no matter how mundane.

The only thing that I’m wondering about is: would a working SEC have hat the power to change anything in, say, the past 24 months?

A recurring theme in this blog is that the whole financial landscape had become unsustainable over the past years, so having a working SEC would probably just have made the current deleveraging and shrinking of assets less painful. But not painless – the fundamentals were just not there for that.

To me, the SEC being corrupt and incompetent is just a thin layer of icing on the cake, but largely irrelevant for the main story.

But what do you guys think?

Anonymous says:

This ponzi scheme has been running a long time.

The Republicans did move for more accounting and oversight for the GSEs but the Democrats shot it down in hearings. So, somebody was aware of misdeeds at the time. Others have been calling for this ending action that is occurring now for years.

The government was fully aware of the financial conditions starting at least with striking M-3 and the recent stimulus checks from the IRS out of the blue as they tried to prop the economy up.

Fractional reserve banking with compounding interest always end this way…inflate to infinity and die anyway…it shouldn’t be a surprise.

Anonymous says:

This is anon4:28 again.

Congress was aware of all of this, and when the SEC tried to make some anti-industry decisions, people in Congress like Joe Leiberman would threaten to cut SEC funding.

bg says:

whoa be me to defend acts of ommission or commission in the crisis. But the big picture is that we had a Minsky cycle. After 20 years of uninterupted moderation, group amnesia allowed everyone to start swimming naked… Until the tide went out.

It sure is easy after the fact to identify the recklessness and all that. I don’t deny the healing quality of finding blame, but I worry that we too easily place blame on the mechanical aspects, rather than soul searching on true root causes.

Banking is built on sand. Should we really put such high stock in the sand police?

Anonymous says:

mxq:

Thomsen, Hanson, and Kreitman were afraid of John Mack.

Naked Shorts covered the firing of SEC attorney who wanted to investigate Mack’s dealings with Pequot Capital / Art Samberg. Naked Shorts Link

Since the investigation was crushed and Aguire was fired, it is hard to say whether Mack or Samberg did anything wrong.

At least Aguirre has enough money from his pre-SEC years in private practice and enough securities litigation experience to build his own practice or find a new job at a firm.

Yves Smith says:

Anon of 2:48 PM,

You are 100% correct re Lieberman, this is very well described in Arthur Levitt’s book Take on the Street. He was reform minded (only modestly so, but even his modest aims were thwarted), a Clinton appointee, and got nowhere.

Also note he got just about no fancy directorships as a result (the usual retirement option for top regulators, which of course encourages a wink and nod attitude, another sign the industry was not happy with him), but to Bloomberg’s credit, he did give him a board seat

mxq says:

anon @ 4:48

thanks for pointing that out…thats my reading for the evening.

RE: lieberman

maybe i’m being naive, but has congress always pushed federal institutions around? (FNM/FRE included)

Anonymous says:

“Without the death penalty for crimes of this magnitude we will have no justice, no peace. You think I’m joking?”

Death sentence for them, and big money for their heirs/charities is too easy. Just slap a one time 50% wealth tax on people with a net worth of over $5M who worked for a bank or fund or money management company at any point in the past 10 years, and raise capital gains taxes to ordinary rates for anyone with income over $250k.

Independent Accountant says:

Anonymous:
The crime you are looking for is 18 USC 225, Continuing Financial Crimes Enterprise. It is a non- RICO crime, but seems to fit what I think are the facts.
I am a CPA and in my less than humble opinion, the Cox SEC is the worst I have ever encountered. I so much prefer the competence and professionalism of the IRS, yes the IRS, over the SEC, you wouldn’t believe it.

YS:
You are talking of “regulatory capture”. C. Walton Hamilton wrote The Politics of Industry, 1957, about just this. The book is a real eye-opener.

Kafka says:

I keep saying there aint no conspiracy all the information is public yet no one cares. Heck, the PPT has been common knowledge forever and Warburg and Aldrich were not that clever or subtle. I feel sorry for those who believe but I truly feel bad for the naïve retirees whose savings have been destroyed under the presumption that they were acting prudently and Uncle Sam would not lie to them. I will say it again, GAAP, GDP, CPI and Unemployment are f…..ing lies. The cash trail and simple math never lie.
………………………………………………………………………………………………

Oct. 7 (Bloomberg) — U.S. Securities and Exchange Commission Chairman Christopher Cox's regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos., according to an unedited version of a study by the agency's inspector general.
……………………………………………………………………………………………
“People can judge for themselves, but it sure looks like the SEC didn't want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior,'' the Iowa Republican said in an e-mailed statement.
http://www.bloomberg.com/apps/news?pid=20601109&sid=av2fpp3blAgY

john c. halasz says:

“whoa be me to defend acts of ommission or commission in the crisis. But the big picture is that we had a Minsky cycle.”

If this commenter had bothered to read Minsky, he’d know that Minsky was an institutionalist, who believed in strong regulation, but regulation carefully tailored to suit evolving economic-institutional contexts. Minsky blasted the “shock therapy” program imposed upon Russia, correctly pointing out that none of the institutional conditions existed, by which it could possibly at all work.

Herb W. of Alabama says:

I am bewildered and a newbie for the board, and to the degree I can grasp much or sometimes little of these complexities, I am wondering among other things: what exactly has Paulson, Bernancke done with their own “savings” and “investments” – is it in trusts and blind or is there a way to find out. What a grande manner to guide our own futures and what would it reveal about the truth versus spin of Washington? All the best.

Anonymous says:

The Founding Father of Constitutional Subversion

http://www.lewrockwell.com/dilorenzo/dilorenzo144.html

Hamilton was the leading advocate of a constitutional convention to “amend” the nation’s first constitution, the Articles of Confederation. He lobbied for seven years to have such a convention convened, constantly complaining to George Washington and anyone else who would listen that “we need a government of more energy.” Patrick Henry opposed Hamilton by sagely pointing out that the Articles of Confederation had created a government powerful enough to raise and equip an army that defeated the British empire, and that that seemed sufficient to him.

At the convention, which scrapped rather than amended the Articles of Confederation, as had been promised, Hamilton laid out his grand plan: A permanent president who would appoint the governors of each state, and who would, through his state-level puppets, have veto power over all state legislation. A national government with the president given essentially the powers of a king is what he advocated. It was all rejected, of course, when the convention spurned Hamilton’s nationalism and adopted a federal system of government instead, with only a few powers delegated to the central government by the sovereign states, mostly for foreign affairs. Hamilton subsequently denounced the new constitution as “a frail and worthless fabric.”

He and his political compatriots, such as Senator Rufus King of Massachusetts, and John Marshall of Virginia, then set about to sabotage the new Constitution by “reinterpreting” the document as something very different from what was clearly written in black and white. His purpose, wrote Cornell University historian Clinton Rossiter in his book, Alexander Hamilton and the Constitution, was to build “the foundations of a new empire.”

Between 1937 and 1995, not a single federal law was ruled unconstitutional by the U.S. Supreme Court. Hamilton’s “rubber stamp” constitution was firmly in place.

ShorelineCT says:

In his book “Take on the Street”, Arthur Levitt Jr., former chairman of the Securities and Exchange Commission, portrayed Lieberman as a hypocrite. Levitt recalled that in 1993, the Financial Accounting Standards Board “voted unanimously to seek comment on a rule that would make companies put a fair value on their stock option grants and record that number as an expense. Corporate lobbyists, outraged by the FASB’s perfidy, persuaded Congress to hold hearings.” According to Levitt, Lieberman “led the charge. He introduced legislation to bar the SEC from enforcing the rule. In addition, Lieberman wanted to strip the FASB of authority by requiring the SEC to ratify each of its decisions, in effect relegating private-sector standards to mere recommendations. Lieberman didn’t stop there. He also sponsored a Senate resolution that declared the FASB proposal a cockamamie idea that would havegrave consequences for America’s entrepreneurs … While Lieberman’s bill did not pass, his resolution did—by an overwhelming 88-9 as an unmistakable signal that Lieberman had the votes to stop the FASB if it pushed ahead.

++++++++++++++++++++++++++++++++++++++++++++++=

INTERVIEW: Arthur Levitt

Chairman of the SEC from 1993 to 2000, Levitt says the Enron scandal is “symptomatic of a breakdown of the ethical values of business over a period of perhaps 20 years.” He is very critical of what he calls “accounting hocus-pocus” or how companies have become more creative in their interpretations of accounting standards. In this interview, he describes the political heat he took during the three big accounting battles of the 1990s, and calls for an independent agency with subpoena power to oversee the accounting industry. This interview was conducted by FRONTLINE correspondent Hedrick Smith on March 12, 2002.

http://www.pbs.org/wgbh/pages/frontline/shows/regulation/interviews/levitt.html

You’ve been talking a lot about distortions of reality. Is the failure to expense stock options a distortion? Does that distort company income?

Yes. Investors should care deeply about expensing stock options, because those options represent a distortion of the earnings of the company. Right now, options are treated as a footnote, but that’s not good enough. Those options represent a claim on the company, and a claim that may very well and has been exercised.

So what you’re saying is stock options are a cost of doing business that businesses don’t show their shareholders?

Stock options are a cost of doing business that is not clear to many American investors.

[Prior to the Gingrich Revolution, what happened in the Senate regarding the FASB rule?]

The Senate passed a [resolution] about the proposal of the standard setter to expense stock options. Why did they do it? There was no question in my mind that campaign contributions played the determinative role in that Senate activity. Corporate America waged the most aggressive lobbying campaign I think that they had ever put together on behalf of this issue. And the Congress was responsive to that.

You have Sen. Joe Lieberman of Connecticut leading the charge. Why?

I don’t know. I honestly don’t know. Sen. Lieberman is my own home senator, and I have great regard and respect for him. I’ve spoken to him about this issue a number of times. And I simply do not understand where he’s coming from.

What were his arguments?

The arguments were the arguments being used by the business community: that this was a break on entrepreneurship; that this would keep companies from being able to hire good people; that this would destroy companies; that this would distort their earnings. All the arguments used by the business community were the ones set forth by Senator Lieberman in his opposition. …