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Friday, April 16, 2010

Whose Laws? The Political (vs. Business) Case for Ending TBTF

The Too-Big-To-Fail Debate

Advocates for cutting so-called "too big to fail" financial institutions down to (less threatening) size -- I'm one of them -- have rightly focused on the systemic risk such entities pose; the unfair, distorting effects on competition such a policy causes, due to the implicit federal guaranties backing TBTF companies (which drives down their borrowing costs); and the monopoly profits TBTF companies enjoy simply as a result of having survived when their smaller ("not-TBTF") competitors have all perished.

But there's an even more compelling reason to break up TBTF entities.

Namely, entities like Goldman Sachs wield far too much political power, which they've clearly used to game the system. (From Wall Street's perspective, showering money on politicians is no doubt just an especially shrewd form of "reinvesting profits.")

"Thumb -- and elbow, and thigh, and . . -- on the Scale"

Perhaps the most insidious aspect of the financial debacle the last two-plus years is to read about some especially egregious Wall Street conduct -- is it still possible to be shocked anymore? -- then to hear the perpetrators claim that "no laws were broken."

As a former corporate lawyer, I take strong issue with that: even given the watered-down (or non-existent) rules governing Wall Street, I can still toss out -- practically in my sleep -- multiple grounds for suing various investment banks.

Like breach of fiduciary duty; conflict of interest; self-dealing; fraudulent and/or misleading disclosure; gross negligence . . . . and ???

Still, my best guess is that the legion of clients screwed by Goldman Sachs and its ilk aren't suing -- yet -- not because of some decision on the legal merits, but: a) because they're broke; and b) Goldman Sachs very much isn't.

Litigation is a financial marathon, and there are plenty of plaintiffs who've walked away empty-handed and financially drained, years later, not because their arguments lacked merit, but because the defendants had more staying power (can you say, "Exxon Valdez?").

Who Made the Rules?

That said, there's no denying that Wall Street got the financial rules that it wanted the last 20-plus years.

A partial list would include:

--Repeal of Glass-Steagall, allowing commercial and investment banks to combine.

--Lax accounting rules for banks, allowing them to substitute "mark to make-believe" for "mark to market."

--Amazingly, no regulation --still -- of credit derivatives -- the instruments at the heart of the AIG debacle (and dubbed "financial weapons of mass destruction" years ago by Warren Buffett).

--Wall Street-engineered exemptions on leverage, allowing Lehman Bros., Bear Stearns etc. to borrow as much as $40 for every $1 of their own money.

So, the next time you hear someone on Wall Street defend their latest skulduggery by saying "no laws were broken," stop to ask, "who made the laws??"

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