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The Wall Street boys: Regulations, no, but tax money, yes

September 21, 2008|By TIM ROWLAND

You wonder if they feel any shame, or if they are even capable of shame.

You wonder if the financial tycoons see the irony - that these purveyors of unimaginable wealth are now crawling, hat in hand, to you and me, the Little Guys, begging for tax money to assuage the horrible results of their horrible greed.

Probably not. After all, they're still living comfortably enough in their $25 million Manhattan penthouses.

As a matter of fact, they'll probably blame us for their troubles. Credit card companies force-feed plastic down our throats, then scold us when we borrow too much. Lenders, without verifying our incomes, smilingly and with authority, tell us that - with a few financial sleights of hand - we can afford a $400,000 home. When it turns out we can't, it's our fault for shunning personal responsibility and failing to read the fine print.

To a degree that's true. But there is (or was) a reason we trusted the banks. As recently as two or three decades ago, they would never lend a cent without the virtual certainty that they would get it back. The standard joke was that the only people who could get a bank loan were the folks who didn't need one. In other words, if we couldn't afford it, they wouldn't lend it. What a concept.

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Of course, simply lending money at interest is boring. The results are predictable, but unspectacular.

Wall Street boys weren't getting rich fast enough. So they began to play games with the numbers to the point that even they themselves didn't understand what was involved.

Money was lent to anyone with a pulse and the risk that these loans might not be repaid was sold to financial houses that repackaged and dressed up the risk (talk about lipstick on a pig) and sold it again. This risk was bought sight unseen, and often it was bought with borrowed money.

Easy loans created high demand. Housing prices skyrocketed way beyond the value of the houses, but people kept buying because the financial institutions kept lending. They borrowed the money they lent. Then, incredibly, they sold insurance to back money that essentially never existed in the first place.

Now we know that nothing was worth what we thought it was. Not the houses, not the loans, not the kooky-krazy derivative packages that resulted from loony accounting models. The kids on the shop floors raked in commissions on the transactions themselves, not caring what, if anything, backed the transactions. The institutional adults who should have been minding the store were too busy enjoying their $1,000 shower curtains to keep track of what their employees were up to.

Sham financial wizardry attempts to produce enormous wealth while producing nothing else. It is fueled by pure greed, and with nothing tangible to buck it up, it is bound to collapse of its own weight. This concept and this truth are not new.

One hundred and one years ago, Augustus Heinze and Charles Morse held control over United Copper and about two dozen banks and insurance firms. But to them, their fortunes were not enough.

They cooked up a scheme to corner the copper market by buying up shares (and driving up the price) of United Copper and then calling in outstanding shares that had been borrowed by investors who were figuring that the stock price would go down - a practice known today as short selling.

Essentially, Heinze and Morse thought they could force investors to pay a greatly, and artificially, inflated price for the borrowed shares.

Instead, it turned out there was plenty of United Copper stock that Heinze and Morse did not control and the scheme collapsed, along with the share price of United Copper and the financial institutions controlled by the two hucksters.

The bank failures spread, leading to the Panic of 1907, which was only quelled by the intervention of the great financier J.P. Morgan, who held all-night meetings with other bankers in the study of his home.

In those days, the bankers had to come to their own rescue - there was no central bank, although the panic did lead to creation of the Federal Reserve System, which would be around to bail out the financiers in the inevitable event that they were to pull some similarly stupid stunt in the future.

Now, of course, they have, and we are the ones who are on the hook because the same financiers who want government money there to back them up if they fail, did not want any government regulations that might have kept them from failing in the first place.

In many capitalistic enterprises, deregulation is a good thing. The markets work on their own. But not always. In Maryland, we've seen the results of deregulating electricity and now we're paying for the deregulation of finance. Electricity deregulation didn't work because of industry dynamics. Financial deregulation didn't work because there is no limit on greed.

The ultimate irony is that regulations were derided as socialistic. Now, because we had no regulations, the U.S. government is the proud owner-operator of a growing number of previously private institutions. In retrospect, a little bit of socialism 10 years ago would have saved us a whole lot of socialism today.

Tim Rowland is

a Herald-Mail columnist.

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