Henry of New York,
medieval regulator

Wall Street weak?
Try the leeches!

By Samuel Insull
Financial Editor

NEW YORK  – The titans of the financial world have been brought low by a fatal combination of their own greed and stupidity and the failure of their Washington branch, also known as the Bush Administration, to regulate the excesses of the market competently or indeed at all.

What's the response of former Wall Street legend in his own mind, Treasury Secretary Henry "Call me Mr. Paulson" Paulson, to a financial system weakened to the point of collapse by unregulated avarice?

Dr. Paulson's Rx is another dose of – wait for it – deregulation. Not just any deregulation, but removing the tin fetters restricting Wall Street's experiments with exotic, highly leveraged, illiquid, opaque, and now known to be toxic financial derivatives, like credit default swaps, and houses built on sand, formerly known as special investment vehicles stuffed with subprime mortgages.

In the Treasury's April, 2008 report on reforming America's broken financial regulatory system, which slipped out almost unnoticed, Dr. Paulson's team of specialists proposed surgically removing the supposed chains keeping great financial institutions like Bear Stearns, Lehman Brothers, and AIG from using innovative privately-traded derivatives.

The Treasury study drew a bright line between regulated depositary institutions, whose failures have contributed exactly nothing to the current debacle but which would be regulated under a new consolidated agency, accountable mostly to the unaccountable Federal Reserve, and everyone else.

The non-banks, or, in the parlance used by the Wall Street Journal for food stamp recipients, the lucky duckies, would be freed from the heavy burden of regulation that has prevented them – from what exactly? A summary of Dr. Paulson's nonsense can be found here.

According to that well-known source of Communist propaganda, The Washington Post:

While some of the proposals call for heavier scrutiny, others actually lighten the amount of regulation. Under one, the Securities and Exchange Commission would give stock markets greater freedom to police themselves and streamline the process for approving new financial products, such as complex futures contracts. Right now, many financial firms simply try to get such products approved by other market regulators or trade them on foreign markets because of the bureaucracy of the SEC, Treasury officials have said. 

Now, there's the cure for what ails us: letting ever more radioactive derivative instruments fly around in unregulated private off-market transactions. Just what the doctor ordered for a financial system close to collapsing from the weight of – unregulated radioactive derivative instruments that no one can value, or even unravel.

Dr. Paulson's miracle deregulation nostrum for financial weakness might not rejuvenate the poor taxpayer, bled white from eight years of no wage growth (not to mention ten years of no gain on Wall Street).  After all, Dr. Paulson and his able assistant Dr. Bernanke have drained quarts of blood from you and me to keep Fannie Mae, Freddie Mac, Bear Stearns, and AIG from infecting the world by guaranteeing their debt or buying their toxic balance sheets.

It reminds us of the old Steve Martin routine about Theodoric of York, medieval doctor, who treated anemia by taking a pint of blood. To paraphrase old Theo, "Someday, maybe we'll have a financial system that combines well-crafted rules with expert oversight by a single regulator, ultimately responsible to the President and the Congress, and taking as its mission the protection of the investor, the purchaser of financial services, and the taxpayer.  This regulator would have the civil and criminal tools needed to restrain arrogant masters of the universe from blowing themselves to bits and sticking the rest of us with the cleanup. And their political overseers would keep a careful watch, their judgment unaffected by high priced lobbyists with pockets bulging with campaign contri--"

"Naah."