Tremble, Banks, Tremble -- Restore the Rule of Law to Wall Street

[Octafish]

The fish rots from the head, or in America's case Wall Street.

Tremble, Banks, Tremble

The key to financial recovery: restoring the rule of law on Wall Street.

by James K. Galbraith
Published on Sunday, July 11, 2010 by The New Republic

The financial crisis in America isn't over. It's ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector.

First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000. Meanwhile the Basel II process relaxed international bank supervision, especially permitting the use of proprietary models to value complex assets-an open invitation to biased valuations and accounting frauds.

Key acts of de-supervision came under Bush. After 9/11 500 FBI agents assigned to financial fraud were reassigned to counter-terrorism and (what is not understandable) they were never replaced. The Director of the Office of Thrift Supervision appeared at a press conference with a stack of copies of the Code of Federal Regulations and a chainsaw-the message was not subtle. The SEC relaxed limits on leverage for investment banks and abolished the uptick rule limiting short sales to moments following a rise in price. The new order was clear: anything goes.

Second, the response to desupervision was a criminal takeover of the home mortgage industry. Millions of subprime mortgages were made to borrowers with undocumented incomes and bad or non-existent credit records. Appraisers were selected who were willing to inflate the value of the home being sold. This last element was not incidental: surveys showed that practically all appraisers came under pressure to inflate valuations in order to make deals happen. There is no honest reason why a lender would deliberately seek to make an inflated loan.

Mortgages were made with a two-or three-year grace period, with a low, fixed interest rate called a "teaser." These were not real mortgages; they were counterfeits, whose value would collapse when exposed. As with any counterfeit, the profits came early, when the bad paper was first sold. After the grace period, rates would reset, and the lenders knew that the borrowers, who were already stretched by their initial payments, would either refinance or default. If they refinanced, that would mean another mortgage origination fee. And if they defaulted, well ... on to step three.

CONTINUED...

http://www.commondreams.org/view/2010/07/11-5

Restoring law and order to the financial system sounds reasonable. Easier said than done, though. Ask Demosthenes.

[denverbill]

1. Sounds like a good idea, but we'll have to ask the bankers if they will let us.

After all, it's they who make the decisions and we who pay for their profits AND losses.

[Octafish]

2. How very Right that is.

Putting history right is another matter. From 2008, the honest truth from David Feige:

Socializing Risk, Privatizing Profit

Thanks for knowing what's what and why it matters, DenverBill!

[jotsy]

3. You do such good work!

I've been screaming around here for months about the EQUAL application and enforcement of the rule of law. The affluent are not asked to be accountable while average citizens are swamped with a barrage of restitution fees for infractions that pale in comparison in terms of damage. The scales of justice, as I see them, are tipped and we are what's dangling ever so vulnerably.

Recommended, as your posts often are.

[Octafish]

4. When will the SEC prosecute for market rigging?

The law does not apply equally: Martha Stewart goes to jail. George "HARKEN" Bush goes to Washington.

Another example:

When will the SEC prosecute for market rigging?

Thank you for the kind words, jotsy. DU's got to do what Corporate McPravda are paid not to do -- spread the truth.

[blindpig]

5. Naw, just bulldoze it....

Let's put something there that is useful and productive for the people.

[Octafish]

6. Outstanding idea, yours. It'd be a case of self-defense and a matter of survival.

Are our elected representatives hell-bent on our nation's destruction? Sure seems like it.

A New York Times article from September 22, 2008:

A Bailout Above the Law

Gee. So...so...prescient. Too bad for us that Congress and pretzeldent Smirko must not have read it.