How on earth did the credit crisis on Wall Street become such a catastrophe, Ben Stein wonders in his latest column for The New York Times? How, he asks, did all of the mechanisms operated by the mind-bogglingly well-paid men and women of the Street go so wrong that we saw a major investment bank, Bear Stearns, essentially disappear?
In an effort to answer those questions, Mr. Stein, a lawyer, writer, actor and economist, points to a speech on the matter that was given on April 8 by hedge fund manager David Einhorn at a Grant’s Interest Rate Observer event.
One of Mr. Einhorn’s more troubling observations, Mr. Stein says, is that the Securities and Exchange Commission allowed broker-dealers to set their own valuations on assets and liabilities that were hard to value. And broker-dealers could assign their own creditworthiness ratings to counterparties in complex derivatives transactions when those counterparties were otherwise unrated.
In a word, Mr. Einhorn says, the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to “discuss the cost to society of increasing the probability that a large broker-dealer could go bust.”
A result of all this, he says, was as follows:
“The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.”
In his response to Mr. Einhorn’s thesis, Mr. Stein writes:
It looks to me as if the inmates are running the asylum. One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity.
To think that people of this mind-set are in charge of the finances of the nation that is the cornerstone of world freedom is terrifying.
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