Wall Street, the housing crash and the world financial crisis: give it back, by gimleteye

On Friday in Manhattan, as President Bush warned against government intervention in financial markets, his government was intervening in financial markets. Congressional Democrats, like Charles Schumer, are crying, "Too little, too late." But too little, of what?

Propping up "free" markets? Bailing out bankers and billionaires whose private jets parked wing tip to wing tip at Washington National Airport while their lobbyists pressured Congress and the White House to limit regulations and supervision by government of the financial industries and markets.

Shouldn't someone be held accountable for pillaging the US economy? The disappearance of Bear Stearns isn't a blameless phenomenon, any more than the looting of public corporations like Tyco by executives who felt entitled to cook the books.

I'm going to make a simple suggestion: "The Financial Services Recovery Act of 2008": to qualify for federal bail out, Wall Street executives and traders and securities lawyers at big law firms must relinquish to a federal insolvency fund the monetary value of individual bonuses paid out over the previous 10 year period.

You want public money to bail out your failed schemes and securitized asset portfolios, that no one wants to own? Give back, then, all the money you made creating them in the first place. You want to keep your bonuses and fees? Then, let your Bear Stearns disappear like shooting stars... without our help.

The American public didn't ask for financial derivatives, using the value of a simple mortgage and leveraging it twenty or thirty times as the case may be, raining down a blizzard of fees, commissions, and wealth every time a new security was created.

When the Federal Reserve last week took the unprecedented action of accepting toxic financial derivatives as collateral for two hundred billion dollars of loans to banks, it began the process of nationalizing the private banking system of the United States. (I use the two hundred billion dollar number loosely: the general public has no idea what the Federal Reserve and US Treasury is doing, now, veiled in secrecy and manipulation of published data on the economy.)

What is happening is unprecedented, at least since the Great Depression. Here is what NYU economist Nouriel Roubini has to say, this morning:

"... essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.

The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages."

American taxpayers should not be asked to be the lender of last resort to an unsustainable model of economic growth without a demonstration of accountability from Wall Street. Forget about golden parachutes and huge severance packages: give us the money back.

Click here to read more of eyeonmiami