Naomi Prins -- It takes a pillage: Behind the bailouts, bonuses, and backroom deals from Washington to Wall Street
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A bit of a rant, but we ignore it at our peril.

Yes, Prins does some shouting.  But, most of her complaints are
right on target.

Follow some of the details and you will learn a bit about how those
in the U.S.  who already have wealth and power use it to get more
wealth and power.  That mechanism makes use of a mutual dependency
between Wall Street and Washington, D.C.  whereby (1) financial
firms gain wealth by taking highly leveraged risks and depend on
the U.S.  government to save them when those risks go wrong and 
(2) Washington (the Federal Reserve, the U.S.  Treasury Department, and
the current administration) knows that it must save those firms or
face disaster.  Prins gives us lots of details about how the two
sides of that dependency works.

And one of the frightening things about all this, is that
Washington has not fixed this dangerous system.  The same system is
still in place, in part because financial interests wield enough
power within the U.S. Federal government so that their power to
take highly leveraged risks has not been limited.  Those same large
institutions are very likely to need a bailout again next time.

One of the clearest examples of the use of the mechanism to create
a crisis and then profit from it is the bailout of AIG.  In AIG,
Wall Street was able to create a financial firm that was so big and
whose transactions were so heavily interconnected with other
financial institutions, that Washington could not dare to allow it
to fail.  Yet, as Prins shows, the money for that bailout was
"passed through" AIG to the firms which had contracted financial
instruments with AIG.  Furthermore, those counter-parties, in spite
of having made losing bets with AIG, were not force to take a
write-down on those transactions.

What's more, the bad loans on the books of many large financial
institutions have not be wound down or written off.  This is
unsurprising, given the fact that the Federal government wants the
banks to extend even more credit in order to get the U.S.  economy
going again.  So, why would they force the banks to write off loans
and reduce their exposure?  Large banks are still effectively
insolvent, or, if you'd rather, over extended and highly leveraged.

Prins spends the needed explaining why this is still the case, but
the take-away point is that, while the U.S.  Congress has the power
to over-see the Fed and the financial regulatory agencies, it is
failing to do so.

Well, perhaps they were just not bright enough to see this crisis
coming and to perform the regulatory over-sight and steps needed to
prevent it.  Prins makes very clear that this is false.  That
excuse just doesn't fly.

Prins finishes up with an explanation of some of the things that we
could have done to fix the system that caused the crisis, but did
not.  It's depressing reading, but needed.  Some of her points: 
(1) We did not increase transparency, but made it worse during TARP. 
(2) We did not require the large banks to recapitalize or to be
broken up and re-structured or to write down their bad loans.
(3) We did not pass sweeping reform legislation; instead we kept the
same system in place.  (4) We did not separate investment banking
from depository banking, in fact we actually merged Bank of America
and Merrill Lynch so as to combine them.

It's a grim story.  But, it needs to be told unless we want to
repeat it.  Come to think about, since many on Wall Street made
huge profits from *this* crisis, perhaps they really do want
another one.

12/16/2010

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