Friday, June 19, 2009

Wall Street Lays An Egg

When I hear so-called financial "experts" on the radio (or even worse, on tv) fret about whether we now will have too much regulation on Wall St., the famous 1929 Variety headline (see title) comes to mind. Once again, capitalism has to be saved from itself. At least one intelligent voice suggested that the problem was not too much or too little regulation but the wrong kind of regulation.

It strikes me that for 25 years our economic gurus preached de-regulation and now we reaped the results. I learned in my Securities Reg class umpty-ump years ago from Louis Loss, who wrote half the original SEC regs, that the whole spirit and theory of SEC regulation was disclosure. But that wasn't entirely the story as we now see that specific bars--such as the Glass-Steagall Act's separation of investment and commercial banks--made a heck of a lot more sense than anyone ever acknowledged when they did away with them.

Derivatives were the perfect place where we went off the diving board. Who understood them? Even people who know a stock from a bond hadn't a clue as to what they were being sold. The old principle about not buying something that you can't define went by the wayside. Orange County's crash was the distant early warning (remember the DEW line?) that nobody heeded.

I worked on the Street long ago as a lawyer and learned quickly that the denizens would take anything that wasn't nailed down and they would drive fleets of Mack trucks through any loophole they could find. But it was the wrong kind of regulation that was in force: first, the SEC focused mostly on disclosure. But somehow derivatives--the crazy kind of product that was then called innovative--slipped through without anyone requiring disclosure because they were excluded from regulation altogether. Absolutely nuts. Instead of focusing on the big picture, I recall the SEC intervening in what were then Chapter X reorganizations and making them unfeasible. This made people turn to Chapter XIs, now Chapter 11s under the new bankruptcy law--the one that gave everything away to the credit card operators. I also recall some guy at the SEC who told me I couldn't say "patent pending" in a prospectus rather than "patent filed"--that's what they were focusing on in those days.

Meanwhile they let the ultimate insider, Bernie Madoff, fleece everyone but heck, he was head of NASD and on SEC committees; how could such a dignitary be an out-and-out crook? You could see that the Boston man who had Madoff dead to rights years ahead of the Ponzi scheme's collapse was totally ignored because he hadn't been on SEC committees or been a mucky-muck honcho at "the Commission" before leaving to make a mint in practice. I saw him on TV, noted his loud sport jacket, and thought that they wouldn't ever listen to this guy because he wasn't one of them.

So yes, we need the right kind of regulation and it has to be more than disclosure. Yes, separation of ownership and management is so complete that we have to regulate CEO salaries because the system cannot do it. The CEOs control their boards or they have made it an accepted bit of practice that there really is a market for their breed and they are worth what they get no matter how badly their company performs.

Let's just look at the whole business in this light: we gave them all the rope they wanted and they hanged us, not them, because the CEOs and the hedge fund guys got away with their ill-gotten pelf for the most part and are laughing out in their McMansions. Remember what Goldfinger told James Bond, "...once is happenstance, twice coincidence; the third time, it's enemy action." In terms of jobs lost and businesses gone, and savings wrecked, this one could compare with the 1930s. If we let the system get rebuilt so there aren't sufficient safeguards against the same thing happening in slightly different form (remember the 1929 calls for margin?), we will be the enemy. Everyone forgot that FDR saved capitalism from itself; what bothers me is that while Obama will end up doing the same thing, he may not go far enough to ensure that we are spared the third round.

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