Until the markets collapsed, the now-disgraced fund manager Bernard L. Madoff also did what his clients expected him to do, producing mysteriously high returns on their investments. Neither his investors nor the Securities and Exchange Commission seemed to care very much how he did it. In this sense, Madoff is to Wall Street as Governor Rod Blagojevich (apparently) is to Illinois machine politics: an egregious emblem rather than a mere anomaly. Just as it is hard to imagine how a politician so mediocre and unscrupulous could have flourished in a healthy political environment, it seems unlikely that Madoff’s scam could have gone undetected for so long in a healthy-and properly regulated-financial industry. (Of course, most investment managers did not commit fraud, and some of them were no doubt as surprised as their clients by the market’s precipitous decline; there has been incompetence to rival the corruption.)
The credit crisis was caused partly by a lack of due caution, both on Wall Street and in Washington. Paradoxically, it is now excessive caution that may keep us from adequately addressing it. The problem is too big to be solved by minor adjustments or executive temporizing. The Obama administration will need to undertake several large-scale reforms, which are bound to be unpopular with the banking industry and devotees of laissez-faire economics. Credit-rating agencies, for example, must no longer be allowed to work for the companies whose bonds they rate. Credit-default swaps, which were originally designed as a kind of insurance but later turned into an instrument for high-stakes gambling, need to be regulated. Investment firms and banks with financial divisions should be required to hold more capital, so that when things go bad they can cover their own losses instead of cadging a government bailout.
Above all, Congress and the new administration should steer Wall Street back toward its principal function, which is to direct capital to the productive part of the economy, not to peddle complex derivatives or place high-risk bets with other people’s money.
Read it all.
A Commonweal Editorial: Gamed
Until the markets collapsed, the now-disgraced fund manager Bernard L. Madoff also did what his clients expected him to do, producing mysteriously high returns on their investments. Neither his investors nor the Securities and Exchange Commission seemed to care very much how he did it. In this sense, Madoff is to Wall Street as Governor Rod Blagojevich (apparently) is to Illinois machine politics: an egregious emblem rather than a mere anomaly. Just as it is hard to imagine how a politician so mediocre and unscrupulous could have flourished in a healthy political environment, it seems unlikely that Madoff’s scam could have gone undetected for so long in a healthy-and properly regulated-financial industry. (Of course, most investment managers did not commit fraud, and some of them were no doubt as surprised as their clients by the market’s precipitous decline; there has been incompetence to rival the corruption.)
The credit crisis was caused partly by a lack of due caution, both on Wall Street and in Washington. Paradoxically, it is now excessive caution that may keep us from adequately addressing it. The problem is too big to be solved by minor adjustments or executive temporizing. The Obama administration will need to undertake several large-scale reforms, which are bound to be unpopular with the banking industry and devotees of laissez-faire economics. Credit-rating agencies, for example, must no longer be allowed to work for the companies whose bonds they rate. Credit-default swaps, which were originally designed as a kind of insurance but later turned into an instrument for high-stakes gambling, need to be regulated. Investment firms and banks with financial divisions should be required to hold more capital, so that when things go bad they can cover their own losses instead of cadging a government bailout.
Above all, Congress and the new administration should steer Wall Street back toward its principal function, which is to direct capital to the productive part of the economy, not to peddle complex derivatives or place high-risk bets with other people’s money.
Read it all.