11/27/2008 05:12 am ET Updated May 25, 2011

Gretchen Morgenson Takes a Scab Off Wall Street

How apposite. It's wonderful to come upon Gretchen Morgenson's lucid parsing of the current crisis. John McCain should read it -- maybe he would then stop erroneously assuming that Fannie and Freddie were the sole culprits.

Like the boy who cried wolf, corporate and regulatory officials have issued a lot of hogwash over the years. Until recently, investors were willing to believe it. Now they may not be so easily gulled.

Companies, even those in cyclical businesses, routinely told investors that the reason they so regularly beat their earnings forecasts was honest hard work -- and not cookie-jar accounting. They were believed.

Politicians proclaiming that the economy was strong and that the crisis would not spread kept our trust.

Brokerage firms insisting that auction-rate securities were as good as cash won over investors -- and, as we all know now, that market froze up.

Wall Street dealmakers were fawned over like all-knowing superstars, their comings and goings celebrated. No one doubted them.

Banks engaging in anything-goes lending practices assured shareholders that safety and soundness was their mantra. They, too, got a pass.

Directors who didn't begin to understand the operational complexities of the companies they were charged with overseeing told stockholders that they were vigilant fiduciaries. Investors suspended their disbelief.

And regulators, asserting that they were policing the markets, convinced investors that there was a level playing field.

Is it any surprise that virulent mistrust seems to own the markets now?

Source: The New York Times

And David Corn offers some salient backstory.

In other words, whoops--there goes decades of Ayn Rand down the drain.

Democrats on the committee made Greenspan eat ideological crow. And after the hearing, Democratic Senator Dianne Feinstein of California released letters Greenspan had written to legislators in 2002 and 2003 that now cast the former chief banker as out of touch with financial reality.

Back then, Feinstein was pushing for regulating financial instruments known as derivatives--particularly those called swaps. In 2000, Republican Senator Phil Gramm, then the chairman of the Senate banking committee, had used a sly legislative maneuver to pass a bill keeping swaps free from federal regulation. (Lobbyists for financial firms had helped to write the bill.) The swaps market subsequently exploded, as financial firms bought and sold swaps as insurance to cover their trading in subprime securities and other freewheeling financial products. In a nutshell: the rise of unregulated swaps enabled the growth of the shaky subprime securities at the heart of the current financial crisis. Greenspan was an ardent supporter of keeping swaps virtually unregulated.

In 2001, Enron, having gone crazy with energy derivatives, collapsed--after the firm had manipulated the California electricity market, costing residents of Feinstein's states billions of dollars. Following that fiasco, Feinstein decided the derivatives market needed to be reined in. As The Wall Street Journal reported in 2004, "When she telephoned Mr. Greenspan for support, he declined, telling her the proposal threatened the multitrillion dollar derivatives industry, which he considers an important stabilizing force that diffuses financial risk."

These economic notes are consistent with the conviction that Barack should steer clear of advisers who were taken in by, or complicit in, the rape of regulation of the last decade. Those who now call the economic crisis a once-in-a-100-year tsunami have been taken in big time. Such blind folk, as F. Scott Fitzgerald said of the rich, are not like us.