The Learning Curve

New tricks for an old dog.

Fixing the problem or protecting investors

Yesterday, William K. Black, Associate Professor at University of Missouri and “Senior regulator during S&L debacle” wrote on The Huffington Post Why Is Geithner Continuing Paulson’s Policy of Violating the Law?

“The S&L debacle led to a new financial regulatory system premised on “prompt corrective action” (PCA). Future posts will explain more fully why this system failed, but it is remarkable that the system, the phrase, and the law have disappeared from the coverage of the banking crises .  .  . Secretaries Paulson and Geithner subverted the PCA law by allowing failed banks to engage in massive accounting fraud (which also means they are engaged in securities fraud). “

Back in the days of my youth  when “conservative” was almost synonymous with “prudent” and the idea of sound banking practices conveyed a modicum of meaning, banks usually obtained the money they loaned from deposit accounts.  In those simpler times the policy choice for dealing with troubled banks was between protecting depositors or stockholders. The law was clearly designed to protect depositors, and those with equity ownership took a bath.

Come the days that banks obtain much of the money they loaned from open market international borrowing and from selling securitized loan pools, the policy choice seems to be whether to protect the bank’s creditors or to protect taxpayers. Highly leveraged lending practices are far from prudent, as recent history has conclusively demonstrated.  Like any other Ponzi scheme, things seem to work remarkably well right up to the point that they suddenly turn to shit. Only those at the top profit.

The operative word in the last paragraph may be “international.”  We have seen Secretary of State Clinton go hat in hand to the Chinese begging them to loan us more money by continuing to buy low-interest Treasury Bills.  If the Chinese and the oil-rich nations have been in the business of extending low-interest loans to the U.S. government, it seems quite unlikely they have refrained from also making high-interest loans to Western banks.

Somebody will be left holding the empty bag, and who that will be may be a much more serious question than commonly imagined.  Some of the candidates have nuclear arsenals or control of the oil spigot.

Is this a banking crisis or an national security crisis?  Who, exactly, is being bailed out? Who is on the top of the pyramid?

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Written by Tom Fox

02/24/2009 at 11:50 am

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