FacebookTwitterGoogle+RedditEmail

Why Cheaters Prosper

by MIKE WHITNEY

Now there’s something you don’t see every day.

If I told you that the Wall Street Journal ran no less than 3 articles in the last week promoting more regulations, you’d think I was crazy. But it’s true. And, for once, the WSJ is right.

Last week, the Securities and Exchange Commission (SEC) voted down a proposal for rule changes that would have helped to avoid another financial meltdown like 2008. The vote was 3 to 2 and– as the editors of the WSJ opined– it illustrates the degree to which government regulators are captured by the industry.

“Captured”? Industry “slaves” is more like it.

Here’s the story: When Lehman Brothers failed in September 2008, there was a run on Reserve Primary Fund, a money market mutual fund that had a paltry 1.2% of its $63 billion in Lehman financial assets. Even so, when Primary “broke the buck” (and could no longer pay back its investors 100 cents on the dollar) panic spread through the market triggering a bank run. Prime money-market funds lost $310 billion or 15%  in less than a week. The panic put stocks into a nosedive which didn’t stop until the Fed extended a blanket taxpayer-funded guarantee on all money market funds.

Four years have passed since the money markets blew up and still nothing has been done to fix the problem, which means that it’s only a matter of time until the next meltdown.

Now, there are a couple of very easy ways to make the system safe again. Either the SEC can require the funds to have enough ready cash on hand to pay investors off “in full” if they want their money back on short notice or financial institutions can explain to investors that there are risks involved when they put their money into money market mutual fund accounts. (and that the value of their investment can go up or down) These aren’t FDIC-guaranteed depository accounts, even though everyone seems to think they are.

Both of these are straightforward solutions that would remedy the situation and assure that the financial system would not suffer another massive heart attack if one of these funds were to dip below 100 cents per dollar.

So why did 3 of the 5 SEC board members vote the measures down?

Well, because the banks don’t want to hold any additional capital to pay off investors in the event of a run. And, because the banks don’t want investors to know that they are actually taking a risk by putting their money in money market mutual funds. (They want to preserve the illusion that these are standard-issue checking-savings accounts) And, finally, because the banks know that if the system goes haywire again, the Fed and US Treasury will ride to rescue with more taxpayer-backed bailouts. So, why would they want to pay when Uncle Sam will cover their losses anyway? That’s how the banks see it.

Here’s a little more background from the Wall Street Journal:

“The industry notes that only two funds have ever broken the buck—and argues this is much ado about nothing. Yet that doesn’t mean other funds didn’t come close. A Boston Fed study—unchallenged by the industry—found “frequent and significant” cases in which companies that sponsor money funds had to bail them out. At least $4.4 billion was provided between 2007 and 2011 to at least 78 funds.”….

…the Treasury’s Office of Financial Research found that in April 2012—after those SEC changes had been implemented—there were 105 money-market funds with combined assets of more than $1 trillion that were at risk of breaking the buck if any of the top 20 outfits in which they invested defaulted. Of those, 14 were at risk of breaking the buck if any of the top 30 outfits in which they invested did so.

In ordinary times, that may be OK. In a crisis, it spells trouble, particularly since the funds tend to invest in the same securities.” (“SEC Can’t Agree on a Fix For Money-Market Funds”, David Wessel, Wall Street Journal)

So the idea that “only two funds have ever broken the buck” is pure baloney. These funds get into trouble all the time, which is why they need to be fixed, so the banks that run them provide the resources necessary to make them safe. At present, the financial institutions are getting a free ride, which is to say, they are recipients of an implicit government subsidy by virtue of the fact that the Fed will be forced to backstop their crappy mutual fund if the there’s another panic. That’s free insurance and, in 2008, it cost taxpayers a bundle.

This whole money market fracas is just like the regulatory issues surrounding securitization, which is the bundling of loans into securities.  Dodd-Frank is supposed to require originators of these garbage products to retain a portion of them for their own accounts. It’s called “risk retention” and it’s no different than an insurance company being required to keep some money on hand in case your bloody house burns down.

Fair enough? Well, of course, the banks don’t want to have skin in the game, not unless it’s your skin or my skin. So, they are fighting risk retention tooth and nail.

And they’re probably going to win that fight, too, because in the good old USA, cheaters always prosper. Just ask a banker.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion. He can be reached at fergiewhitney@msn.com

COMING IN SEPTEMBER

A Special Memorial Issue of CounterPunch

Featuring recollections of Alexander Cockburn from Jeffrey St. Clair, Peter Linebaugh, Paul Craig Roberts, Noam Chomsky, Mike Whitney, Doug Peacock, Perry Anderson, Becky Grant, Dennis Kucinich, Michael Neumann, Susannah Hecht, P. Sainath, Ben Tripp, Alison Weir, James Ridgeway, JoAnn Wypijewski, John Strausbaugh, Pierre Sprey, Carolyn Cooke, Conn Hallinan, James Wolcott, Laura Flanders, Ken Silverstein, Tariq Ali and many others …

Subscribe to CounterPunch Today to Reserve Your Copy

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

April 26, 2017
Richard Moser
Empire Abroad, Empire At Home
Stan Cox
For Climate Justice, It’s the 33 Percent Who’ll Have to Pick Up the Tab
Paul Craig Roberts
The Looting Machine Called Capitalism
Lawrence Davidson
The Dilemma for Intelligence Agencies
Christy Rodgers
Remaining Animal
Joseph Natoli
Facts, Opinions, Tweets, Words
Mel Gurtov
No Exit? The NY Times and North Korea
Alexandra Isfahani-Hammond
Women on the Move: Can Three Women and a Truck Quell the Tide of Sexual Violence and Domestic Abuse?
Michael J. Sainato
Trump’s Wikileaks Flip-Flop
Manuel E. Yepe
North Korea’s Antidote to the US
Kim C. Domenico
‘Courting Failure:’ the Key to Resistance is Ending Animacide
Barbara Nimri Aziz
The Legacy of Lynne Stewart, the People’s Lawyer
Andrew Stewart
The People vs. Bernie Sanders
Daniel Warner
“Vive La France, Vive La République” vs. “God Bless America”
April 25, 2017
Russell Mokhiber
It’s Impossible to Support Single-Payer and Defend Obamacare
Nozomi Hayase
Prosecution of Assange is Persecution of Free Speech
Robert Fisk
The Madder Trump Gets, the More Seriously the World Takes Him
Giles Longley-Cook
Trump the Gardener
Bill Quigley
Major Challenges of New Orleans Charter Schools Exposed at NAACP Hearing
Jack Random
Little Fingers and Big Egos
Stanley L. Cohen
Dissent on the Lower East Side: the Post-Political Condition
Stephen Cooper
Conscientious Justice-Loving Alabamians, Speak Up!
Michael J. Sainato
Did the NRA Play a Role in the Forcing the Resignation of Surgeon General?
David Swanson
The F-35 and the Incinerating Ski Slope
Binoy Kampmark
Mike Pence in Oz
Peter Paul Catterall
Green Nationalism? How the Far Right Could Learn to Love the Environment
George Wuerthner
Range Riders: Making Tom Sawyer Proud
Clancy Sigal
It’s the Pits: the Miner’s Blues
Robert K. Tan
Abe is Taking Japan Back to the Bad Old Fascism
April 24, 2017
Mike Whitney
Is Mad Dog Planning to Invade East Syria?    
John Steppling
Puritan Jackals
Robert Hunziker
America’s Tale of Two Cities, Redux
David Jaffe
The Republican Party and the ‘Lunatic Right’
John Davis
No Tomorrow or Fashion-Forward
Patrick Cockburn
Treating Mental Health Patients as Criminals
Jack Dresser
An Accelerating Palestine Rights Movement Faces Uncertain Direction
George Wuerthner
Diet for a Warming Planet
Lawrence Wittner
Why Is There So Little Popular Protest Against Today’s Threats of Nuclear War?
Colin Todhunter
From Earth Day to the Monsanto Tribunal, Capitalism on Trial
Paul Bentley
Teacher’s Out in Front
Franklin Lamb
A Post-Christian Middle East With or Without ISIS?
Kevin Martin
We Just Paid our Taxes — are They Making the U.S. and the World Safer?
Erik Mears
Education Reformers Lowered Teachers’ Salaries, While Promising to Raise Them
Binoy Kampmark
Fleeing the Ratpac: James Packer, Gambling and Hollywood
Weekend Edition
April 21, 2017
Friday - Sunday
Diana Johnstone
The Main Issue in the French Presidential Election: National Sovereignty
FacebookTwitterGoogle+RedditEmail