PASADENA – I consistently read Thomas Frank’s column in
Harper’s Magazine each month. His August piece talked extensively about the
cozy relationships between regulators and the business world and how it led
to the 2008 financial collapse – nothing new there.
Frank, whose prose are both elegant and sobering, delved
into the fine details of the subject. He examined how rating agencies such as
Moody’s and S&P (the agency that recently downgraded America’s bond rating)
endorsed the risky packaging of securitized mortgages (credit default swaps and
the like).
Everyone knows what happened, but these rating agencies
ignored the words of the companies and the economists who said such financial
products could bring down the whole system.
Countrywide Chief Executive Officer Angelo Mozilo called
such products “the most toxic assets” he had ever seen.
But the buffet ensued. The rating agencies blessed the
transactions, the banks sold them and the financial houses made off with
billions before getting bailed out.
The rating agencies bestowed favor on the toxic soup of assets, in part,
because the financial sector would take their business of having such financial
vehicles rated to some other agency willing to do the work. As with Enron, if
Arthur Anderson refused to help them cook the books, someone else would.
The actions and attitudes remind me of my 12th grade
Economics class. My teacher, Mr. Scher, was trying giving a lesson on the
dangers and illegality of insider trading. A student, who won’t be named
but is now a stock broker, raised his hand and questioned whether insider
trading was wrong. His premise – why should he not benefit from inside
information? That’s how business is done.
Wall Street has a saying when its minions engage
in activity that will bring down the economy in the long run, but make instant millions for its participants: “I’ll be gone, you’ll be gone.”
In short, those who pillage the system will get away with
their money before the smoke clears and their regulator friends start asking
questions. With very few exceptions, does anyone besides the average investor
or the taxpayer get punished for perverse twisting of our financial system? It
is a winner-take-all/consequences-be-damned culture.
And that culture has spilled over to the public sector.
Public employee pensions were devastated in the collapse, but the policymakers and the employees who negotiated the defined
benefits are long gone. Pasadena’s Fire and Police Retirement System stands as an example.
The system hatched in the 1930s, bailed out more than once with taxpayers
supported refinancing, is buckling under the weight of unfunded mandates and an average payout of $4,400 per month to the 275 employees who reap the
benefits.
Those employees and the lawmakers who set up the system – like those who bilked investors and homeowners in the days preceding the
financial crisis – are long gone.
Like a bad date, who’s left with the bill, the taxpayers?
Frank argues that regulation is the fix and he is partially
right. This is also about culture.
We now have a culture of feeding at the trough
in business and government that at some level knows the system is unsustainable
even if we returned to 1950s era tax rates. But that doesn’t matter because the
beneficiaries and their supposed adversaries – the regulators, the credit
agencies and the lawmakers – will be long gone before someone actually has to
pay for this mess.
We need regulation and reform, but we need to tell that 12th
graders in Economics class just because you can stick your hand in the cookie
jar and get away with swiping an extra Lorna Doone that doesn’t make it right, especially
when there won’t be any cookies left for anyone else.
