Perhaps you can assist me. There must be something wrong with the “picture” I am about to draw, but no one with wealth, power, status, and privileges to conspicuously consume and endlessly hoard has said anything. Their bought-and-paid-for politicians and absurdly enriched minions in the mass media are also silent.

Picture this:

A remarkably tiny group of conniving, deceitful, ostentatiously greedy, patently fraudulent financial schemers on what is left of Wall Street in the remaining investment houses and the major {stress-tested} banks that are described as “too big to fail” are at one and the same time being given hundreds of billions of dollars in taxpayer money, racking up billions of dollars in profits, and paying themselves millions of dollars in bonuses. All the while, millions of people are losing their livelihoods, homes, pensions, etc.

What is wrong with this picture?

Sincerely,

Steve

This is hubris.

Hindsight is always 20/20. After the fact, the problem is never “as difficult as it may appear.” We’re geniuses now, though apparently we were imbeciles before the collapse.

The factors cited as contributors (or as answers) to the financial collapse: leverage, margin, risk, and concentration, were already regulated and under the purview of the SEC, the Fed, other bank, state, market, or other regulators.

Capital controls, margin requirements, internal risk control systems, disclosure (transparency) requirements, audit standards, compliance regulations, performance (market) expectations, access to capital (public and private) markets, are mere details that make up the foundation of the financial system. Simple, this is not. And this foundational/regulatory complexity spawns so-called loopholes, much like our legal and tax system–if it is not explicitly forbidden, then it is allowed (and perhaps, required).

Humans make mistakes, and last I checked, regulators are human too. This characteristic will not be overturned, by legislation or regulation.

Our rules-based system attempts to remove human judgment, and therefore ill-judged (usually, after-the-fact) mistakes, from of the workings of the financial system. Moral and ethical judgment regarding right and wrong are proscribed–supplanted by this rules-based system of do’s and don’ts.

And still, it was a fundamental judgment–an assumption–that led to this calamity. And that assumption was home prices would inexorably continue to rise–and in this rise was a cushion of safety upon which our foundation would rest.

While pointing fingers can be politically satisfying, I think the record is pretty clear–mistakes were made regarding the constancy of rise in home prices, and all our institutions–legislative, executive, regulatory, and financial markets–contributed.

While no one factor triggered the meltdown, the totality of the commitments (and reinforcing feedback loops) to this assumption are pretty impressive: the CRA; “affordability” mortgages; low (negative real) interest rates from the Fed; Fannie Mae and Freddie Mac morphing into trillion dollar, hedge fund-like institutions with, essentially, one-way bets on interest rates and home prices; rating agencies rating securities lacking transparency (CDOs, CDO-squared, et al.); over-the-counter derivatives, e.g. CDSs, with its inherent counter-party risk, rather than exchange-traded that reduces such risk; bank capital requirements advantaging AAA mortgage securities; risk models based on Gaussian “normal” distribution when financial market disruption is anything but normal; tax treatment of mortgage interest and home re-sale capital gains; and on and on and on. While lengthy, the list is not exhaustive of the contributors.

Markets are messy. They require rules and procedures. There is no way around this fact-of-life. Tackle each of the issues and factors individually in the requisite venue so that “we” might systematically and institutionally learn the appropriate lessons from these mistakes—experience being the only teacher available. It will require hard work and effort from many quarters. There is no omniscient (or centralized) body that can “know” how to get each of these issues right.

I am not suggesting we throw our hands up in frustration and futility because it will be difficult, but unlike Mr. Singer, I do not see a silver-bullet answer–passing the responsibility off onto another layer of regulation and regulators, be it a global framework, foundation, umbrella, or mandate, and hope they get it right.

Besides, hope is not a plan, it is a prayer.

I am in disagreement. Everyone, investors, capital allocators etc need to be responsible.
“I lost because the regulators didn’t prevent 30-1 leverage”, read a freaking annual report and take the risks you want and wish to bear.
Citibank specialized in firing 1sr tier talents and hiring 4th tier, everyone knew that, is that what you want to own? It was doomed. Weill paid himself $1BILLIOn in 2000, free market? Theft. Buffett sold on that news. Buffet pays himself $100,000 annual.

Equity investing has risks, people who don’t want to takie and bear the +s and -s of outcomes, shouldn’t own equities, get out don’t come back.

In 1980 I started as a stock broker and dealt with many in a small college town. Consistently I had 25-32 yr old young academics who would sell stocks gifted to them by parents and grandparents. Military-industrial-complex polluters!! Others bought those stocks.

We are all different and have different desires.

25k of Exxon in 1981 is worth 645k today- the buyer wanted Exxon risk and seller wanted out, each got what they wanted and deserved.

Grow up, be responsible and don’t complain.

COF

- F. A. Hayek, from “The Road to Serfdom” 1944.

AIG went broke guaranteeing MBS (Mortgage Backed Securities) and CDOs (Collateralized Debt Obligations). The MBS were rated AAA by government regulated and approved ratings agencies. The CDOs were rated AAA because they were built on the AAA MBS bonds. AIG was furthering a market in CDO bonds that the government wanted to expand. The government was happy with the operations of AIG.

Much of the MBS may have been privately issued, but they were entirely similar to the MBS issued by Fannie Mae and Freddie Mac, called GSEs (Government Sponsored Enterprises).

Fannie, Freddie, and all other issuers were directly regulated by the House Financial Services Committee (Barney Frank and Maxine Waters among others) and a special regulator OFHEO. Fannie Mae and Freddie Mac were specifically put outside the regulation of the SEC, outside the influence of the Bush administration, and under the captive OFHEO.

Congress maintained close oversight of what Fannie, Freddie, and others were doing, and approved of it. Congress created OFHEO (The Office of Federal Housing Enterprise Oversight) especially to regulate FanFred. The much larger and more visible SEC (Securities and Exchange Commission) was available, but Congress wanted its own regulator.

OFHEO was captive to House congressional committees, and outside the influence and control of the Bush administration. All of the private issuers of MBS and CDOs were under the same regulatory regime. This was the regulatory regime that Barnie Frank and Chris Dodd were running.

The House committee regulating banking and financial services (the Financial Services Committee) did not object, and actually encouraged more lending to subprime borrowers.

Barney Frank (D. MA) has served as ranking (most senior) Democratic member on this committee at least since 1992, and has chaired the committee since 2007 in the Democratic majority.

There is a long history of Barney Frank proclaiming that all was well with Fannie and Freddie, and no further oversight or inquiry was needed.

It is laughable that more government “regulation” will have a good effect. Our difficulties arise from trust in government regulation, and that regulation was designed to specifically do things that were MORE risky and MORE systemic than any group of independent agents would do in a free market.

We Guarantee It

The government found a way to spend as much as it wanted, by guaranteeing the debts of off-budget government agencies, called GSE’s. The current bailouts and huge budgets continue to serve the self-interest of politicians and government aligned groups.

I could, we all could, go on with examples. But the basic problem is that both Singer and Krauthammer are right. We need regulation, but not by the clowns currently in office.

The only regulations worth having are variants of “tell the truth to your customers, the whole truth and nothing but the truth.”

You say “we need formulate new regulations to curb irrational and dangerous risk taking.” and I say buzz off, I’ll take risks just as dangerous as I choose, you gotta lot of nerve telling me what I can or cannot do. Just make the industry tell me the truth.

Singer says the regulations “must assess and measure risks accurately, including the compounded risks of herding”. Once again, buzz off, I’ll assess and measure my own damn risks.

Just stop those guys from lying all the bloody time. Madoff lied. Moody’s lied. The Dems are lying about the CRA. Chris Dodd lies all the time. Barney Frank has never told the truth about anything. Geithner? An honest man? Sure, no doubt about it.

The outcome might be the same, but I think they better describe some of the issues. With more information, markets handle risk better (that is, they can better anticipate risks).

More importantly, it seems that statists will be able to abuse calls for “more”, “different”, or “better” regulation. I always hate to see news reports that give the impression that conservatives agree that markets have failed or that existing regulation is not strong (read: intrusive) enough.