The multi-trillion dollar meltdown of financial markets in 2007-09 could not have been prevented. It was absurd speculation on the part of the special Presidential Commission to even suggest this impossible nirvana. No way Jose!
Let me tell you why. As my esteemed friend Jim Stone, chairman of Plymouth Rock Assurance headquartered in Boston, puts it so succinctly; "We have wagered our place in history on our relative strength in finance. Bad bet."
The financial markets crisis could not have been prevented because Alan Greenspan, chairman of the Federal Reserve Bank, for 18 long years the power center in the nation for monetary policy, did not believe in reining in the animal spirits on Wall Street. He chose to ignore pleading from wise titans like Loews Corp. Laurence Tisch, and Wall Street great John Whitehead, who begged him to turn off the spigot of easy money and rock-bottom interest rates.
Yeah, it could have been prevented if Greenspan had actually taken steps to dampen down "irrational exuberance," his description of the craziness that began in the mid-1990s -- and continued to accelerate until mid-2007. Regrettably, Greenspan's utter and naive faith in free market ideology, makes him look a fool -- not the God-like figure we all created.
Yeah, it could have been prevented if the Clinton administration led by Robert Rubin and Larry Summers had not blithely agreed to deep-six the discipline of the Glass-Steagall Act -- which in 1933 wisely separated the activities of the investment banks and the commercial banks -- and had ensured relative stability on Wall Street for over half a century.
Sure, the meltdown could have been prevented if these very same chaps in cahoots with the SEC and some conservative members of Congress had not ambushed an attempt to regulate the fastest growing financial market in the world -- the explosion in the use of derivatives -- from being regulated in any way, shape or form.
The leverage unleashed by these new securities was never understood or considered to be a danger despite warnings from wise heads like Warren Buffett. Ignorance ruled the day.
Yeah, the meltdown could have been prevented in 2004 if SEC Chairman Bill Donaldson and 2 of the other 4 Commissioners had not buckled under Wall Street's demand that the ceiling on the use of leverage -- borrowed money -- be raised to unimaginably dangerous levels like being able to borrow $30 or $40 for each $1.00 of capital the banks held. So was endangered the entire financial system with the verdict applied from Washington, DC.
Yeah, the meltdown could have been prevented if only Tim Geithner, then resident of the New York Federal Reserve Board, had only carried out the duties handed him to oversee, i.e. regulate the money center banks like Citigroup. He did nothing to protect the system before the crisis exploded and the financial system was threatened.
I've been dying to ask Geithner if he ever reviewed Citigroup's financial statements to recognize just how dangerous to its survival were the excessive off-balance sheet operations that were not at all in the "shadows" of the shadow banking system -- but were right there in front of him. Need I remind you that Citigroup shares fell from $60 to 97 cents in 2009?
Yeah, maybe the panic that ensued in September 2008 might have been prevented if Hank Greenberg -- while he was CEO and Chairman of AIG -- had liquidated the $240 billion of risky credit default swap contracts on his balance sheet -- or if his successors had comprehended the hari-kari they were committing by doubling the 100% leveraged book of insurance to over $500 billion of disaster waiting to happen.
And I could go on. But, I'll leave you with this uncomfortable and disturbing thought. The absurdity of this commission's conclusion is expressed so bluntly by Douglas Holtz-Eakin, the Chicago economist, who revealed yesterday that the majority Democrats on the commission and the Republican minority were so alienated from each other they weren't even communicating -- well before the reports were even written.
All this sordid and tragic mess that Wall Street made for itself with the passive lack of assertion by those responsible for cleaning up the mess. And how ironic it comes in the wake of hedge fund operator John Paulson making for himself some $5 billion in one year of operation -- an unbelievable multiple of what the chairman of Goldman Sachs, Morgan Stanley, JP Morgan Chase earn -- which is not chump change either.
So, I turned to a financier I highly respect, Jim Stone, chairman of the CFTC in the Carter administration, now the CEO and Chairman of a private insurance company in Boston, Mass. -- Plymouth Rock Assurance -- a hardy competitor to Berkshire Hathaway's Geico.
Here's what Stone sent me; It's definitely food for thought.
"I think the crash would have been easy to prevent: leverage limits of 5 to 1 (or even less) would have done that. Cut leverage and we can all relax a bit."
"A society can be judged by whom it chooses to reward most highly. The closer the reward scale is to the contribution scale, the better for the nation's future. A trader may be brilliant and honorable, as many are, but their work is not of the sort that will keep America a great, strong nation. That problem is not so easily correctable. We have wagered our place in history on our relative strength in finance. Bad bet."