Are these Screen Actors Guild members in Chicago in April only pretending to be Wall Street bankers? Maybe. (AP photo)
Wall Street reform is complicated, so why should the press even bother with it?
COMMENTARY | May 13, 2010
Martin Lobel says that if the press doesn’t blow away the smokescreen covering Wall Street gambling – haughty, naked bets with taxpayer guarantees – then reform will fail. It’s that simple.
By Martin Lobel
It’s time the press blew away the smokescreen emanating from Wall Street and showed the public what derivatives really are. If it doesn’t, the “reforms” being debated on the Hill will merely perpetuate our economic problems.
Credit Default Swaps
(CDS) are nothing more than naked bets that another derivative like a Collateralized Debt Obligation
(CDO) is mispriced, although, under the “efficient market theory” that Wall Street embraced, the price of the bond should already reflect its market value. CDS’s generate huge profits for the large banks that trade in them, but do nothing to help get our economy moving again. Banks are supposed to allocate capital to its most productive use, not use their assets, particularly those guaranteed by the taxpayers, to gamble. Indeed, CDS’s would not exist if former U.S. Senator Phil Gramm
(R-Texas), now Vice Chair of UBS, had not slipped into federal law a provision exempting derivatives from state gambling laws.
The risk to our economic system is all too apparent. For each CDO, there could be 12 CDS’s issued by those who are too thinly capitalized to pay off should an unforeseen event occur. When that happened in 2008 and the housing market crashed, the taxpayers were forced to spend untold trillions of dollars, directly and indirectly, to bail out our financial system while our economy tanked. In short, Wall Street managed to capitalize the profit and socialize the risk and then went right on doing the same things and making exorbitant profits.
You can find discussions of these issues in the media but not anywhere near the extent needed. What’s needed? Simple. What’s needed is enough intelligent coverage so that lawmakers know the public is watching. And coverage not only in the elite press but in regional news organizations as well.
So far most of the “reform” proposals nibble at the edges of the problem. Making derivatives more transparent by requiring them to be publicly traded on an exchange is already being fought by Wall Street even though such a proposal will continue to socialize the risk because no exchange will have enough capital to meet the demands of an unexpected event. Guess who does? The taxpayers.
We should require banks to separate their banking and investment functions so they don’t use taxpayer guaranteed funds to gamble with. And, if a bank is too big to fail, we should make sure it isn’t. We should also eliminate the exemption from state gambling laws which could be a very effective curb on those financial instruments that are more akin to bets than productive allocations of capital.
We need to make those who would trade risk their own capital and salaries without taxpayer guarantees. Wall Street traders were far more cautious about assuming risk when they were in partnerships and the partners were personally liable. And we should make those who make representations to clients responsible for those representations. We should not allow Goldman Sachs or others on Wall Street who put together deals to claim they were merely market makers who don’t have an obligation to their clients to be truthful about the deal they were selling.
None of this will happen, if the media don’t keep the public informed about what is really at stake, because the army of lawyers and lobbyists deployed by Wall Street will prevail. We cannot afford to let that happen.