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"We have learned that voluntary regulation does not work," SEC chairman Christopher Cox told a House committee today (Oct. 23). More significantly, former Federal Reserve Chairman Alan Greenspan confessed, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms." Greenspan was admitting that he did not understand that, among many things, banks and other companies were operating for short term gain and to maximize the already-obscene pay of top executives, and they were happy to put their shareholders at risk to achieve these repugnant objectives. Greenspan did not want regulation of derivatives. This means that he watched housing prices zoom, knew that mortgages were being bundled and sold to investors as derivatives, and he didn't consider the possibility of the bursting housing bubble blowing up the whole derivatives edifice. Between the lines, he is also admitting that he saw the credit default swaps, essentially insurance on debt through derivatives, and didn't foresee that derivative-choked financial institutions, including insurance companies, would become insolvent, setting off a chain reaction as institutions could not hold up their end of the credit default swap contracts. Apparently, Greenspan did not understand that the essence of white collar fraud is contrived complexity. Derivatives are bewilderingly complex -- deliberately. Few understand them. And here's our dilemma: regulators wouldn't have understood them, either. However, regulators at least could have kept track of who owned credit default swaps. And regulators could have performed other administrative tasks. The question: is it too late? Can all this be unwound? The SEC has failed in its regulation, too. It will pounce on a guy who makes $100,000 in a pump and dump, but look the other way at the nabob who rakes in $500 million in a pump and dump. This happens largely because of the symbiosis between SEC lawyers and the large securities law firms that the regulators will eventually work for.
"We have learned that voluntary regulation does not work," SEC chairman Christopher Cox told a House committee today (Oct. 23). More significantly, former Federal Reserve Chairman Alan Greenspan confessed, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms." Greenspan was admitting that he did not understand that, among many things, banks and other companies were operating for short term gain and to maximize the already-obscene pay of top executives, and they were happy to put their shareholders at risk to achieve these repugnant objectives. Greenspan did not want regulation of derivatives. This means that he watched housing prices zoom, knew that mortgages were being bundled and sold to investors as derivatives, and he didn't consider the possibility of the bursting housing bubble blowing up the whole derivatives edifice. Between the lines, he is also admitting that he saw the credit default swaps, essentially insurance on debt through derivatives, and didn't foresee that derivative-choked financial institutions, including insurance companies, would become insolvent, setting off a chain reaction as institutions could not hold up their end of the credit default swap contracts. Apparently, Greenspan did not understand that the essence of white collar fraud is contrived complexity. Derivatives are bewilderingly complex -- deliberately. Few understand them. And here's our dilemma: regulators wouldn't have understood them, either. However, regulators at least could have kept track of who owned credit default swaps. And regulators could have performed other administrative tasks. The question: is it too late? Can all this be unwound? The SEC has failed in its regulation, too. It will pounce on a guy who makes $100,000 in a pump and dump, but look the other way at the nabob who rakes in $500 million in a pump and dump. This happens largely because of the symbiosis between SEC lawyers and the large securities law firms that the regulators will eventually work for.