New Haven Independent

But in both cases, the catastrophe — and for many, it will be — was a result of the failure of governmental institutions to plan for disaster, or to safeguard the safety and soundness of our markets and therefore the financial security of our citizens. The results will be felt in loss of jobs, losses in our state pension funds, loss of state revenue — particularly, but not only, in Fairfield County — loss of adequate revenue to cities, loss of access to credit, and reductions in retirement accounts just as large numbers of baby boomers are retiring.

In this case, the backdrop happens to be partisan and ideological, because reforms enacted by FDR during the Depression in the wake of the stock market crash were repealed by Republicans. Complex areas of the market operated without transparency, much less regulation.

The table was set in 1999, when the Republican Senate in Congress, led by Senator Phil Gramm over the threat of a Clinton veto, repealed the Glass-Steagall Act which had prevented banks from making risky investments with customer’s deposits. Another Depression reform (1938) was the uptick rule restricting short selling. Bush’s SEC repealed the uptick rule in 2007.

Depression reforms certainly created winners and losers, and markets had changed, so reform was needed. But Phil Gramm didn’t want update or reform. He wanted repeal, and after a standoff with the Clinton White House, he got it. Then he went to work at UBS and was a McCain spokesman — until he called Americans “whiners.”

This ideological bias against governmental regulation continued even after the
collapse of Bear Stearns in March 2008.
Bush and Christopher Cox, chair of SEC, responded to a systemic problem as if it were a problem with individual institutions. Therefore, they did nothing to look at the capital reserves of lenders, at the lack of transparency of hedge funds, at unregulated credit swaps, at the consequences of repeal of Glass Steagall or the effect of the uptick rule repeal in a down market.

Instead, Cox walled off 19 institutions and restricted the ability to sell their stocks short. That order expired Aug. 12.

The Bush administration’s emergency order was flawed for several reasons, all stemming from their insistence on seeing Bear as an individual bank run, not a symptom of systemic failure. For example, the order protected some institutions and not others, harming their rivals. In addition, those same institutions themselves had been selling short.Further, the administration had no plan after Aug. 12, the expiration of the limited order. After that, the floodgates opened.

Why is this happening now? The slide began almost as soon as the limited order expired. But an important date looms. This Friday is Triple Witching Friday , one of the four days a year when all options expire and markets become volatile - up or down. If anything would go wrong, it would go wrong this week.

It is telling that last weekend the SEC was invisible, and the Fed came to the fore, framing the issue as whether or not the government should bail out firms with taxpayer dollars.

That’s the wrong question, and the outcome was predictable. Lehman’s collapse triggered a run on others. If AIG had gone down, Citibank was surely next. So after doing nothing, the Bush administration intervened. Now we own AIG.

This year is a presidential election, sort of like witching Friday except in politics. So the Bush administration and Senator McCain, because they are the party of incumbents, will look for scapegoats. Wall Street and short sellers will be blamed and symbolic actions proposed. Everyone will be indignant. Perhaps a commission will be appointed.

But this is not over. Federal policymakers are just shifting blame and buying time.

Today, the SEC once again trotted out reforms of short sellers. Lame and late.

Short selling can be a legitimate tool of risk management if proper rules are set and markets are transparent. Short sellers exacerbated this, but are not to blame. And pace John McCain, the “greed” of Wall Street (exempting Phil Gramm presumably) is not to blame either. On the ground, a trader, whose salary is largely an end of year bonus, sees only his (or her) rivals.

It’s the role of government to set, and enforce, ground rules to prevent dishonest traders from getting an advantage over honest ones. It’s the role of government to protect the public from the incompetent.

For anyone expecting to retire within in the next five years, check your retirement account (or don’t). Our state pension funds lost $50 million when only Fannie Mae and Freddie Mac went under. We’ll find out the rest of the losses later.

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