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VIP Member
By William K. Black
The ongoing U.S. crisis was driven largely by financial derivatives. Nine of Americas systemically dangerous institutions (SDIs) failed or had to be bailed out Bear Stearns, Lehman, Merrill Lynch, Fannie, Freddie, AIG, Countrywide, Wachovia, and Washington Mutual (WaMu). The SDI failures were primarily due to losses caused or aided by the sale and purchase of enormous amounts of fraudulent derivatives, and deregulation, desupervision, and de facto decriminalization proved exceptionally criminogenic. The Commodities Futures Modernization Act of 2000 and the Gramm, Leach, Bliley Act of 1999, respectively, made credit default swaps (CDS) into a regulatory black hole and repealed the Glass-Steagall Acts prohibition against banks mixing commercial and investment banking.
The Dodd-Frank bill should have repealed the two deregulatory acts passed near the end of Clintons term with broad bipartisan support, but the Obama administration never tried to go back to the legal governance system for finance that worked brilliantly for nearly a half-century and Jamie Dimon and JPMorgan led the lobbying blitz that ensured that the Dodd-Frank Act would have the taste, depth, and substance of light beer made by an enormous commercial American brewery. The Volcker rule was intended to partially restore the Glass-Steagall Act by restricting banks proprietary derivatives investments to hedging. The rationale was that there is no public policy basis for providing federal subsidies to banks to speculate in financial derivatives. That public policy argument against subsidizing dangerous bets by banks in derivatives is compelling and cuts across all political spectrums. Among banks, only the SDIs are massive users and issuers of financial derivatives. The largest SDIs love financial derivatives. Merrill Lynch failed because it was the largest purchaser of its own green slime derivatives, particularly collateralized debt obligations (CDOs) backed largely by endemically fraudulent liars loans. Such purchases were guaranteed to swiftly make Merrills investment officers wealthy and destroy the firm. My most recent columns have quoted Dimons dictum about accounting control fraud:
Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow.
READ MORE Dimon Lambastes Loans and Expresses His Devotion to Derivatives | | New Economic PerspectivesNew Economic Perspectives
The ongoing U.S. crisis was driven largely by financial derivatives. Nine of Americas systemically dangerous institutions (SDIs) failed or had to be bailed out Bear Stearns, Lehman, Merrill Lynch, Fannie, Freddie, AIG, Countrywide, Wachovia, and Washington Mutual (WaMu). The SDI failures were primarily due to losses caused or aided by the sale and purchase of enormous amounts of fraudulent derivatives, and deregulation, desupervision, and de facto decriminalization proved exceptionally criminogenic. The Commodities Futures Modernization Act of 2000 and the Gramm, Leach, Bliley Act of 1999, respectively, made credit default swaps (CDS) into a regulatory black hole and repealed the Glass-Steagall Acts prohibition against banks mixing commercial and investment banking.
The Dodd-Frank bill should have repealed the two deregulatory acts passed near the end of Clintons term with broad bipartisan support, but the Obama administration never tried to go back to the legal governance system for finance that worked brilliantly for nearly a half-century and Jamie Dimon and JPMorgan led the lobbying blitz that ensured that the Dodd-Frank Act would have the taste, depth, and substance of light beer made by an enormous commercial American brewery. The Volcker rule was intended to partially restore the Glass-Steagall Act by restricting banks proprietary derivatives investments to hedging. The rationale was that there is no public policy basis for providing federal subsidies to banks to speculate in financial derivatives. That public policy argument against subsidizing dangerous bets by banks in derivatives is compelling and cuts across all political spectrums. Among banks, only the SDIs are massive users and issuers of financial derivatives. The largest SDIs love financial derivatives. Merrill Lynch failed because it was the largest purchaser of its own green slime derivatives, particularly collateralized debt obligations (CDOs) backed largely by endemically fraudulent liars loans. Such purchases were guaranteed to swiftly make Merrills investment officers wealthy and destroy the firm. My most recent columns have quoted Dimons dictum about accounting control fraud:
Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow.
READ MORE Dimon Lambastes Loans and Expresses His Devotion to Derivatives | | New Economic PerspectivesNew Economic Perspectives