Political Class Financial Follies

As the country slowly moves out of the "Great Recession" the political class has suddenly taken an interest in financial markets and reforms to avoid what we just went through from an economic perspective. As we discussed yesterday, the St. Petersburg Times reported this past weekend that Congressional hearings were held to try and find a preventive solutions to the last downturn. Also, the Senate Finance Committee, spearheaded by Senator Chris Dodd is trying to get a new financial markets regulatory bill passed.

The question is whether we really think Dodd and the rest of the fools in Congress and the administration really have any chance of getting this right. Or is it just another charade of follies that we will all go through, pretending that all is well until the next blowup takes the political class and the Federal government's regulatory agencies by surprise. Consider:

• Bernie Madoff was a suave, smooth talking con man that ran one of the biggest pyramid schemes ever, defrauding his clients of close to $50 billion over a long stretch of years. No one in the government, Congress, the SEC, the Treasury Department, the Federal Reserve Board, etc. had any idea of the ongoing fraud until it was much too late. Thus, thousands of people with the responsibility of protecting investors got it wrong. However, according to any number of news sources, Harry Markopos, an investment analyst with a Boston financial firm, unmasked the fraud about five minutes after his boss assigned him the task of figuring out how Madoff continued to get great returns. Confident of his findings, he sent detailed analyses to the SEC five times, starting in May, 2000, years before the Madoff scheme collapsed. If the government and political class could not do this simple analysis to figure out what was going on when a single person (Markopos) could, what makes us think Dodd and the rest of them have gotten any smarter?
• Speaking of Dodd, he was a member, and later committee chairman, of the Senate Banking Committee for several years and never saw the second biggest financial collapse of all time coming until it hit him in the face. What makes us think that he can reform the financial markets now? He obviously did not understand the financial markets before, since he missed the collapse, I doubt he got so smart that now understands what needs to be done.
• A recent New York Times article, that was reprinted in the St. Petersburg Times, by Michael J. Burry outlined another tale similar to the Markopos story. Burry ran a hedge fund until 2008 and was one of the subjects of Michael Lewis' new book, "The Big Short." According to the article, Burry became suspicious of many facets of the housing market, e.g. very low interest rates, subprime mortgages, etc., and aggressively sent letters to clients of his hedge fund, correctly predicting a housing market collapse in the second half of 2007. Assuming that he was right, Burry made a lot of money for his clients by understanding how things work in the financial market and anticipating the housing and mortgage crash. Thus, Burry did a little analysis and was correct in his conclusions while "our leaders in Washington either willfully or ignorantly aided and abetted the (housing) bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the President and senior members of Congress underestimated the severity of the problem." Thus, much like Markopos and the Madoff scheme, Burry did a simple analysis to understand the problem while the "best" brains in Washington could not figure it out.
• After the Enron, Worldcom and other financial accounting scandals of the late 1990s, the political class passed the Sarbanes-Oxley Law that was supposed to tighten up accounting standards and regulation so that investors would have a clear view of a company's financial health. Step 48 in "Love My Country, Loathe My Government" calls for the repeal of that law for a number of reasons, not the least of which is the fact that mountains of data and reports are created that are virtually never read by anybody in government. This wastes in incredible amount of American business resources that could be better spent improving our competitive position in the international business market. The "Great Recession" provides another reason for repealing this bill, i.e. it does not work. Two of Wall Street's biggest financial firms collapsed as a result of the housing and mortgage market meltdown. Bear Sterns was formed in 1923 and Lehman Brothers was formed in the early 1860s. These were large, prominent firms that had been successful for decades and decades. However, they went belly up (Lehman disappeared, remnants of Bear Sterns were picked up by JP Morgan) almost over night. Thus, the Sarbanes-Oxley was a total failure here in that it provided no indication of how dire these firms' accounting and financials were until they went poof. Another political class "financial reform" that did not work.

As you can see, the political class financial reforms over the years of just been follies of hope without any understanding of the underlying root causes of the crisis of the moment. Without understanding how things work and what the root causes are, the chance the government can solve any financial markets problem is next to nothing.

Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble.