[THS] Finance superstars talk about the massive fraud in our economic system

Sun Mar 14 13:26:47 CET 2010

Finance superstars talk about the massive fraud in our economic system
By Joe Costello, AlterNet

http://www.alternet.org/story/145942/

Last Wednesday, I attended a conference initiated by the Roosevelt Institute on the
financial mess, called Make Markets Be Markets. The conference's speakers included
people with experience on Wall Street, the banking industry, government and
academia; Nobel Prize-winning economist Joe Stiglitz, Elizabeth Warren, and other
luminaries who have offered an alternative and reformist narrative to our recent
financial crisis.  At two and half hours, it was relatively short, giving each speaker the
opportunity to make their points and providing a sharp focus. One underlying theme
of the event was fraud, the great elephant in the room, that neither the press or our
government officials acknowledge, though it is a fundamental element to the financial
crisis and its solutions.

Joe Stiglitz started the conference and stated how reducing transparency and hiding
information was an essential element to the crisis. Stiglitz concluded, "Innovation was
regulator and tax arbitrage." Wall Street and the banks deliberately added opacity
and complexity to confuse clients and consumers. Elizabeth Warren pointed out,
"complexity made a lot of profits," for example, she showed how the average credit
card contract in 1980 was one page, today it is thirty.

This opacity and complexity helped make the financial industry predatory against
their clients and customers. Not only did government regulatory agencies fail in
stopping this confidence game of historical magnitude, but so did markets. NYU's
Lawrence White pointed out the credit agencies such as Moody's and S&P, whose
role is to provide independent analysis, essentially became co-conspirators as their
business model changed from being paid by investors to being paid by the Wall
Street issuers, making it against their interests to issue dour ratings on investments.

The only truly rigorous aspect of economics is accounting. It's no surprise that as the
banks and Wall Street sought opacity and confusion through complexity, their
greatest target would be the accounting system. There were various elements of
"accounting innovation", but the largest, most notorious, and completely incredulous
was the practice of "off balance sheet" accounting. One of the greatest elements of
this off-book accounting was secularization-simply, the practice of taking existing
debt, be it mortgages, student loans, or even credit card debt, bundling it together,
then selling it as a completely different product. Financial analyst Josh Rosner, who
called the Fannie and Freddie accounting scandal in 2001 and the housing peak in
2005 stated:

    "Poorly developed and opaque securitization markets drove excess liquidity and
irresponsible lending and borrowing...securitization markets too often operate in a
"Wild West" environment where the rules are more often opaque than clear,
standards vary, and useful and timely disclosures of the performance of loan level
collateral is hard to come by. Asymmetry of information, between buyer and seller is
the standard."

While Mr. Rosner pointed to the problems of securitization, Frank Partnoy, a finance
and legal expert, went after the greatest scam, the derivatives markets. Mr Partnoy
pointed out there is currently $600 trillion in derivative positions on a global economy
of $60 trillion. Derivatives are another off-balance sheet innovation, in which
speculators may take pure gambling positions, allowing them to take positions on
matters in which they have no stake. It was in paying-off derivatives that a $185
billion of tax-payer money flowed through AIG. Today, then New York Fed head
Timothy Geithner, Treasury Secretary Hank Paulson, and Fed Chair Ben Bernanke all
claim they didn't authorize this payout, the check seemingly magically sent.

To make his point even clearer, Mr. Partnoy put up Citi's official balance sheet, saying
it was a "fictional balance sheet", representative of an industry in which financial
innovation made the most basic accounting, the one thing which can offer real
insight into a company's health, just another part of an elaborate scam.

Michael Greenberger of the University of Maryland made the important point that
most of what we all call financial innovation is simply the resurrection of many old
practices, outlawed in the 1930s, now dressed in new garb. He pointed specifically to
the 1936 Commodities Exchange Act as representative of all New Deal financial
reform. It insured transparency, open exchanges, anti-fraud, and anti-manipulation.
He contrasted this to the 2000 Commodities Futures Modernization Act which gave
modern derivatives and open field. Greenberger noted the Act was supported
vigorously by then Fed Chair Alan Greenspan, SEC Chairman Arthur Levitt, and
Treasury Secretary Larry Summers. The law turned derivative markets into history's
largest casino and its proponents knew exactly what was coming and preempted
state gaming laws, thus derivative gambling could be completely unfettered.

Rob Johnson of the Roosevelt Institute was the last speaker and talked about the
final arbitrage, which is "too big to fail." It is the arbitrage of the republic by looters
who have created a system so rife with fraud that it brought down the American
economy, throwing millions out of work, paying the very perpetrators trillions of
dollars and counting. These very same people bought and sold our elected officials so
often in the past several decades, that today DC might very well be deemed the one
functional market. You actually get what you pay for.

The conference put out a very excellent report available here.
http://www.makemarketsbemarkets.org/

If we're going to get our economy up and running again, the first thing we're going
to have to do is end the fraud.
Read more of Joe Costello's work at Archein. He's been involved in communications,
energy and political economy for three decades. He was communications director for
Jerry Brown's innovative 1992 presidential campaign and was a senior adviser for
Howard Dean's effort in 2004. He's spent two decades thinking and acting on the
confluence of information technologies and democratic political economy. He has
written extensively on politics, finance and energy.