Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Saturday, October 4, 2008

Venal Bastards on Wall Street

A friend sent me a bailout article which basically tried to expand on the following:

"Wall Street's actions are now profoundly hurting American families, communities and the entire U.S. financial system. People are being thrown out of their homes."
---Eric D. Hovde, Washington Post, 9.21.08

I wrote a response to a friend, part of which I'll subject you to here:

Venal bastards they are! Schwartzman, Kravis, Fuld, even Fain. Rail at them! Demonstrate in front of their buildings! Send them nasty letters.

However, note that it is not against the law to be a venal bastard. This is a very important point, overlooked in most of these bailout/moral hazard articles.

I read a lot of free-market religionistas bemoaning the bailout(s), saying socialism is here, the free market is dead. Indeed, a frequent bemoanment is that too much regulation got us to this point - long on accusation, short on specifics. Did you watch Sarah Palen on Thurs? Lots of incoherent Rush Limbaugh aphoristic nonsense about getting rid of regulation so the free market can flourish. (This was right after she wailed greatly that she and McCain would descend on Wall Street and sweep the greedy and evil bastards away - uh - how?)

The Calvinist enjoinder to live by the golden rule, to be moral or the poetic justice of a just society will take you down is the Force and it is strong in America, but not on Wall St. The venal bastards say - poetic justice, fine, but later. I see a way to make some money, so I'm going to do it.

Intellectually, the creation of CDO's, SIV's, and CDS's - the shadow banking system - is a wondrous thing to behold. Venal it is, but wondrous none the less. And these guys created this stuff because they were very smart, they figured out how to do this without breaking the law, so they did it.

In the article by Hovde, there is no solution/resolution proposed, only some vague reference to safety nets, and hoping the influence of Wall St. on Washington abates. This is at best silliness.

My solution: The smart guys will not explicitly break the law. You have to have specific laws for them not to break. Will they find new ways to get around new regs? Sure, but as we are supposedly adults, this is no reason to abandon hope. Realize that you will always be creating new regulations as the scene changes. Realize you will make some mistakes. Realize you will have to modify your approach. This is what being an adult is like. Pressing on, despite setbacks and uncertainty.

Actually, and unexpectedly (now that many people have vague notions what CDO's and CDS's are) it would be pretty easy to regulate them. Make them be traded only on exchanges. Make a duck law for securities - if is looks like a security and acts like a security, then it is one, and must be regulated by the SEC. If something like this had been in place, there would be no big crisis. Why? - one big reason is because there would be (have been) leverage limits on investments - 12X probably being the max (like banks). Without 30X leverage on CDO's, no housing boom/crisis or any other financial crisis as we know and love them today.

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