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Many valuable links from tomorrow’s WSJ.

In its own way, the Stanford calamity is arguably worse than the SEC’s Madoff bungle. In the Madoff case, passionate outsider Harry Markopolos could find no one at the SEC who took the time to understand the scam, cared enough and had enough authority to shut down the fraud. In the Stanford case, we see numerous SEC insiders over many years urging—at times begging—the enforcement staff to take action, to no avail.

More here.

Or how about this one skewering the Commander in Thief:

“The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government’s cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.”

Or how about this:

“Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.”

“One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.”

Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

Recently, President Obama has taken to accusing others of representing “special interests.” In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because “the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis.”

He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.”

And then there is this beauty from Gerry O’Driscoll outlining what a modern Fascist country looks like:

Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it. While protecting citizens against force, both at home and abroad, is the government’s most basic function, protecting them against fraud is closely allied. By the use of force, a thief takes by arms what is not rightfully his; he who commits fraud takes secretly what is not rightfully his. It is the difference between a robber stealing brazenly on the street and a burglar stealing by stealth at night. The result is the same: the loss of property by its owner and the disordering of civil society. And government has failed miserably to perform this basic function.

The SEC chose to ignore the evidence brought to its attention. Banking regulators allowed a kind of mortgage dubbed “liar loans” to flourish. And so on.

We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105 … an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings

The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application.

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect (wintercow: that’s just ONE of many lessons of public choice theory) … regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.”

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Read the rest. Have a lovely day.

UPDATE: Here is one more doozy:

In March, the Government Accountability Office concluded that the government does little to verify manufacturer claims and that most of its approvals are automatic for any company that applies. The GAO obtained Energy Star endorsements for 15 bogus products such as a gasoline-powered alarm clock, an “electric office hammer” and a “room air cleaner” that was a feather duster attached to a space heater.

One Response to “But the Super-Duper Powered New SEC Would Get it Right THIS Time”

  1. Harry says:

    Many of us had to bother with getting registered and tested to get into the securities business. Mine was for the NASD, down at Girard, near Penn. Studying for it was useful a bit. You had to be able to define leverage, financially. If you passed the test, as long as you were not a felon, financially speaking, you could trade securities with anyone. I had to learn the assorted Securities Acts, including The Investment Advisors Act of 1934, or whatever the year was.

    Since then, and during my training, I have always wondered how all this stuff was worth anything, except I always knew I should not trade for my own account before others. Never did that, never will.

    Few of us, certainly not I, could possibly have ever profited from “front-running.” It as always bothered me that great armies of lawyers have mustered and profited from the sins of their bedfellows, all of who use other people’s money. Shouldn’t informed people question a broker who tells them they should trade every week, even the broker discloses his firm may from time to time have a position in the stuff in the broker’s basket of wares?

    I do think there has been deep corruption in all of this, and not merely by the rating agencies, but chiefly by the winks and nods by Congress and the favoring of politically-connected creditors. None of this revolting situation will be corrected by another layer of foxes watching over the henhouse.

    But then this is all like the Department of Agriculture, right?

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