Finance Industry Quotes

Credit default swaps were in large part responsible for the melt down of the economy of 2008 and the Great Recession thereafter. A credit default swap was one of the favorite derivatives that became popular. Is an insurance policy that a company will pay off its bonds and not go bankrupt. It is a cross between an insurance mechanism and a stock exchange type security mechanism, and through heavy lobbying, escaped any kind of regulation. It cost a company no money to write a credit default swap, and they were paid to do so. As long as business and the economy was good, it was a terrific business but there was no way of ever knowing how much risk they were taking. So companies who wrote credit default swaps did not have to have the money to pay to back them up. When that happened in 2008, even the largest insurance company in the world collapsed because of the risk of having to pay the credit default swap and the U. S. Government had to take over the insurance company. In 2010, the Obama administration passed a financial reform bill that began to regulate credit default swaps. Buffet, the American who had made the most money in financial securities, realized the great danger not only to the company, but to the entire national economy. Most of the rest of the financial institutions, could make large amounts of money without have to have much capital as long as things went well. So credit default swaps began to exceed the other financial instruments in activity. Neither the Federal Reserve or the other government regulatory agencies chose to regulate these risky instruments nor even to require that they be publicly disclosed -- See {637987}, {637986} and {637992}.

Between the politicians and the financial industry lobbyists the laws are written so that there is sufficient room for enough self dealing so that members of Congress can get rich using methods that are questionable but have been legislated as legal and the Congressional rules have been written so that they are “not unethical”. Many members of Congress leave the institution much wealthier than when they entered but have received salaries that are insufficient to build that kind of wealth. Many then accept lobbying or other jobs at very high pay representing the people and corporations who have been the subjects of their legislative efforts. Other members do not avail themselves of the “legal” self dealing as the practice is not universal.

Arguably, for most of American History, most of the “smartest” people contributed to manufacturing, construction, research and development—activities that produce things that are wanted and/or needed. However, Wall Street began attracting and paying for some of the smartest people in the society, who when they engaged in finance—not only contributed less to manufacturing, but began to create highly complex financial instruments and procedures that few people could understand and with which regulators have difficulty understanding. These and the other schemes of financing have been major factors in the economic problems that have beset the economy including the meltdown of 2008 and the subsequent Great Rescission.

In the economic meltdown of 2008 and the aftermath, there were so many criminal violations of law in the financial industry that even the Democratic administration of Barack Obama chose not to jail the violators but to levy some large token fines albeit ones which were very affordable for the institutions who had to pay them—in many cases paying them with money made as a result of profits on no-interest money they received in bailouts after the 2008 Meltdown.

At the time, the financial industry spent more money for lobbyists and campaign contributions than any other sector of the economy. The result is that they had extraordinary access to and influence upon members of Congress and their staffs, that more often than not, the actually drafted the language for laws, amendments and regulations and then les the strategy to pass the legislation or finalize the rule. Moreso than any other industry, they wrote their own rules. Even after the Meltdown of 2008 and the Great Recession where there was a public outcry for reform, the Dodd Frank legislation was influenced by the industry and after passage most of the rules and interpretations were written by the industry or greatly influenced by them.

Born thought that her agency was responsible for regulating the new esoteric financial products—derivatives including credit default swaps—for otherwise there would be no regulation at all of financial products that could dwarf the stock and bond market. Summers persuaded her to back off. When the Meltdown of 2008 hit, the huge derivative exposure of the large banks and some insurance companies was so great that it was one of the major causes for the meltdown of the entire banking system. Summers, normally a great economist not only called this one wrong, but later, along with most other government and private economists ignored a very explicit warning—See {637168}, {637986}, and {620038}.

U. S. Treasury Secretary Larry Summers called Rajan a “Luddite” for this view, but what Rajan observed and predicted was exactly what happened in the Meltdown of 2008 which led to the Great Recession. Rajan was one of the few economists to call this right. Several, invested their own money assuming a crash and made billions. Most, like Summers and the Federal Reserve Chairmen in retrospect admitted that they missed the signs and didn’t connect the dots. See {637168}, {637987}, and {620038}

For many general government regulations—labor, environment, non discrimination—the small business has a proportionately heavier burden of compliance. So large businesses have always been able to count on small business to lobby against regulation and for deregulation. However, when it comes to financial regulation such as the Dodd-Frank regulations essentially apply to large businesses. As a matter of fact, small businesses were on many ways the most frequent victims of the large banks and investment bank excesses in the Meltdown of 2008. Before most of the regulations could even take effect, the financial industry was already trying to get small business to lobby to roll back the protective regulations preventing future meltdowns and bank failure resulting from loose regulation and greedy irresponsible financial industry behavior. The President campaigned to convince the small business not to support the finance industry over their usual “knee jerk” reaction to any regulation.

[Most Americans do not realize that not wall bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC). That insurance covers only a basic amount ($250,000 at the time of the quotation was written, but nothing over the basic amount. There is no federal insurance for all the stock brokerage accounts. There is private insurance that will generally protect against the failure of a particular brokerage company failure, but that would not help in an industry wide failure]