How Big Firms Were Allowed to Leverage Debt to Assets at 33:1

paulsen.jpgA must read article from the New York Times explains how a little-known ruling in 2004 eliminated the requirement that large investment banks retain a reasonable amount of cash to cover losses.

Here’s an excerpt:

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. [The fox guarding the hen house possibly?]

Still, nothing illegal happened. There’s no one to prosecute since they got permission. How scary is that???

On the topic of a dissenting view of the bailout, check out this awesome clip from Representative Kaptur from Ohio (Thanks The Soccer Mom Vote!) While I have argued that it was probably necessary to bail out the ultra-wealthy, I liked that Kaptur called out the Paulsen crew for the fear-mongering and obfuscation. Considering Paulsen was somewhat instrumental in CAUSING the meltdown. (see above!)

Possibly Related Posts:

  • Share/Bookmark
October 16, 2008 | Filed Under Great Recession 

Comments

One Response to “How Big Firms Were Allowed to Leverage Debt to Assets at 33:1”

  1. It All Started With Fractional Reserve Banking… : duh pookie on February 15th, 2009 7:25 pm

    [...] a conflict-of-interest policy that bars people like Henry Paulson (see previous post) and Phil Gramm from crossing over from the private sector into a government role, and from holding [...]

Leave a Reply