Bernie Sanders: The solution: The major Wall Street banks must be broken up....

[jmowreader]

141. Phil Gramm, Jim Leach and Thomas Bliley were Democrats? Who knew?

My feeling is, Clinton was suffering the effects of torture at the hands of the Republicans. I wonder if they'd have gotten the same bill off his desk in 1993.

But no nevermind, the goal now isn't to point fingers but to make sure it doesn't happen again. We know now that if Glass-Steagall isn't appropriate it's because it isn't strong enough to defeat the threats facing the financial system today. In 1929 there were no derivatives. Jerome Kohlberg wasn't busily inventing the leveraged buyout - four-year-old boys don't do those things. And in fact, since 1933 we had written laws outside Glass that SHOULD have been able to protect the financial system.

I've used a phrase repeatedly throughout the crisis: The problem wasn't what you couldn't do, but what you could. The very easiest example is the Goldman, Sachs Abacus scandal...you know, the one where they hired the nastiest short in the market, John Paulson, to bet against the US mortgage market and caused people to lose billions? Guys, google up the prospectus: they told you that was exactly what would happen. There is a very important phrase in there: synthetic exposure to the mortgage market. Everyone knows mortgages sometimes fail. People have been foreclosed on for nonpayment since forever. Since the risk of default necessarily discourages people from writing mortgages, someone invented an insurance policy for them, the credit default swap. It's not really insurance. There is a law about insurance: one counterparty must own the covered risk, the other must own the money to pay out a certain number of claims. Neither is true with CDS. What GS did was to hire Paulson to pick out a bunch of mortgages to buy naked CDS (the ones where you don't hold the note), securitized them, and offered them to people in a zero-sum game: if the mortgages failed GS won; if they were paid off the outside investors won. Given that scenario - basically, a casino where the dealer has both money in the game and control of the outcome - why the fuck do you think Goldman would have done anything other than they did?

My financial reform bill would have been effective:
A. No firm will be in more than one of the three traditional financial industries.
B. Firms in one industry may not pay finder's fees to anyone in the other two. They can recommend them as a friend, but not be paid by them.
C. No naked derivatives.
D. No multilayered derivatives. The collateralized debt obligation is a "chicken pot pie" derivative: you throw all the old crap no one would eat into a chicken pot pie and hope no one notices what it is, and in the same way you throw derivatives no one will buy into a CDO. The problem is the same in both cases: if something goes bad and makes you sick, was it the three-week-old lima beans or the $3 million in Sears credit card receivables?
E. No government bailouts that let a firm go back to business as usual.