Who Will Investigate Our Subprime Lawmakers?

by Steven M. Cohen  •  Dec 31, 2007 at 6:42 am

http://www.buyselljump.com/2007/12/who-will-investigate-our-subprime

In today's Wall Street Journal, reporter Glenn Simpson wrote a terrific page one story outlining the subprime lending industry's enormous influence on Congress and various state legislatures. It used that influence, of course, to ensure that the Feds and important states did not pass legislation that would have limited subprime lenders' ability to continue to make loans under ludicrously lax standards. That influence was purchased through concerted, expensive lobbying efforts as well as with direct contributions to many dozens of entities including state politicians, both major parties' national committees, and even President Bush.

The industry was ensuring that it could go on making the very loans to otherwise unqualified borrowers who today are defaulting in droves, sending shock waves down Wall Street and out into the economy. Wall Street's complicity in the process should come as no surprise; never lacking for innovation, inventive financial engineers ground up those loans and created sausage-like securities bearing the imprimatur of investment banks and the stamp of approval of the ratings agencies.

That the raw meat for these sausages was rotten either did not occur to anyone, or perhaps Wall Street was in a collective state of denial, blinded by the high fees created by these Frankensecurities. Investors, including pension funds and other alleged fiduciaries were only too happy to make the relatively high returns offered by subprime bonds. So participants on both ends of the transaction were happy until the roof caved in, certainly not the first time that Wall Street has experienced the phenomenon of being blindsided by its own "creativity," and recognizing only after the horse was out of the barn and the barn had burned down that the safety of these securities was only an illusion.

But plenty of short-term wealth has been built by illusions on Wall Street, and the cycle of the boom and bust of the invention of the moment, the mania and craze factor of investing, will go on forever, as perhaps it must in a market relatively free of government over-regulation.

However, Wall Street was merely the purveyor of this refuse, a packager and dealer, so to speak. The more profound failing here was the free reign with which loan originators were permitted to operate, seemingly handing out loans without the application of sensible rules or discipline, thereby creating the raw materials bankers used to construct these innovative, wondrous new securities.

Where were the state and federal regulators, whose role is usually to intervene and interfere for no positive purpose, indeed often to the detriment of a business or industry, at one of the rare moments when their intervention might actually have been constructive? Where were they when they should have been providing protection to unqualified borrowers who were lured by the availability of easy money at seemingly low rates, which of course have now skyrocketed as the value of their property has plummeted? Evidently they were busy being influenced by lobbyists for the subprime industry, and perhaps seduced by the generous cash handouts individual companies were throwing around.

Now Congress is in the proverbial shocked! shocked! mode, feigning surprise and sympathy for those unfortunate victims who are defaulting by the minute. In a familiar pattern of exquisitely awful timing, Congress will now seek to pass laws "remedying" the situation which will actually impede credit and exacerbate the problem significantly; count on "lawmakers" to make a bad situation worse every time in their zeal to show constituents they are "doing something" about the problem.

State legislators will also pile on with cures that are worse than the disease. But, ironically, these very public servants will largely escape public scorn even though they looked away as the storm was gathering over a period of several years. Public opprobrium will be reserved for lenders, brokers, and bankers, while congressmen and state officials pontificate about the avarice of the financial community.

The problem remains that Congress can't and won't investigate itself, and will not take responsibility even for a failing that so obviously is a major component of the present credit crisis. It barely acknowledged the mess it created not long ago with the savings and loan catastrophe. It will similarly quickly forget about its malfeasance in connection with this latest scandal, as the individual members focus their attention on the coming election and what it means for their political prospects.

Pervasive, corrosive, nefarious lobbying efforts will continue uninterrupted, because this system, in which one soiled hand soils the other, has little transparency and no governing device. It is precisely what continues to enable trial lawyers to play their bogus litigation game regardless of the damage they inflict on our system of justice and the economy, just as the subprime lenders would have continued their activities had reality not interceded.

For that is the point: it was not our politicians, our lawmakers, our officials charged with protecting the public, who stepped in and shut down the activities that have now contributed to serious economic dislocation. It was simply the fact that the law of gravity once again determined the final outcome. Their failure is a scandal that transcends even the most egregious activities of subprime lenders and Wall Street financial engineers.

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