AIG is not goverment's mess. They decided to insure insane amount of CDO, which are not regulated, and being used not for hedging, more like bets in the market. Lehman Bros/Bear Stearn are not governments mess. They decided to leverage themselves at an absurd 1/30+ ratio. The goverment has been staying away from them, and look what happened.
I don't disagree. At least not entirely. Where I disagree is in the distinction between what government should and shouldn't do, and how the "didn't do" played out in this particular disaster. If government is to take part in a free market economy, it's purpose is to enforce contracts, prevent fraud, and come down hard on those that lie, cheat or steal: trust is the most important currency in a market economy, and when it's lost, nothing works anymore. Pyramid or Ponzi schemes are illegal in the United States. Seems to me that a very strong case can be made that CDOs are merely the modern equivalent. At the very least there was significant deception happening at the point where junk debt was re-branded as quality debt, and that claims that this junk debt was "insured" against loss were simple fraud.
We have laws for all of that, and in a just world, there would be consequences. But, we're talking about some of the wealthiest people on earth...consequences aren't really their style, and our government agrees with them.
I'm not saying the finance industry, or a large percentage thereof, is free of blame. I'm saying it's like bike theft and the New York and San Francisco black market: it's a wholly unpunished crime, and so it is rampant. For the kind of people willing to do anything they can get away with to make money, the US government extended an open invitation to lie, cheat, and steal your way to a few million or billion bucks.
> I'm saying it's like bike theft and the New York and San Francisco black market: it's a wholly unpunished crime, and so it is rampant.
I totally agree with you.
Regarding Credit Default Swaps and Interest Swaps, a lot of this is due to the fact that they weren't regulated like insurance, even though that is how they were being used.
I read the other day that some hedge fund had sold CDSs to Lehman to insure against losses on $2 billion of asset backed securities. The hedge fund only capitalized the subsidiary selling the CDSs with $4 million.
There is a reason we regulate insurance companies... to make sure they maintain adequate capital to back up their policies. This creates trust in the market that buying insurance will actually protect you.
So, like you said, the government has a role in enforcing contracts and preventing fraud. In this case they failed to regulate CDS instruments to ensure proper capital ratios.
I don't disagree. At least not entirely. Where I disagree is in the distinction between what government should and shouldn't do, and how the "didn't do" played out in this particular disaster. If government is to take part in a free market economy, it's purpose is to enforce contracts, prevent fraud, and come down hard on those that lie, cheat or steal: trust is the most important currency in a market economy, and when it's lost, nothing works anymore. Pyramid or Ponzi schemes are illegal in the United States. Seems to me that a very strong case can be made that CDOs are merely the modern equivalent. At the very least there was significant deception happening at the point where junk debt was re-branded as quality debt, and that claims that this junk debt was "insured" against loss were simple fraud.
We have laws for all of that, and in a just world, there would be consequences. But, we're talking about some of the wealthiest people on earth...consequences aren't really their style, and our government agrees with them.
I'm not saying the finance industry, or a large percentage thereof, is free of blame. I'm saying it's like bike theft and the New York and San Francisco black market: it's a wholly unpunished crime, and so it is rampant. For the kind of people willing to do anything they can get away with to make money, the US government extended an open invitation to lie, cheat, and steal your way to a few million or billion bucks.