Three-Card Monte

For several decades, the financial players have had a wonderful time playing the game of Three Card Monte. Instead of having just three cards on a sidewalk stand or three walnuts and pea, they’ve had a half dozen regulators and literally a hundred countries to hide in.

Why else would the AIG Financial Products operation be set up in London, supervised by the US Office of Thrift Supervision, and write private insurance contracts called Credit Default Swaps on US mortgage bonds issued by unregulated non-bank finance companies owned by Wall Street brokerages? Lots of walnuts, just one pea (the risk), and literally dozens of street corners where the pea could be hiding, that’s why.

The proposed Consumer Financial Protection Agency would put a stop to the game of choosing the weakest regulator, and then hiding in some corner of the world that prizes financial secrecy. It would regulate activities, not institutions, and that would spoil the fun.

Imagine if we had regulated mortgage lending from a single authority, no matter who makes the loan? Perhaps the trigger to the meltdown, the subprime mortgage business and its evil derivative spawn (CDO and CDS) would not have turned into a threat to the entire world economy. After all, roughly 90% of the subprime mortgage bonds were issued by virtually unregulated entities controlled by Wall Street and a handful of “non-bank” finance companies like Ameriquest, New Century and Countrywide.

It’s time to put aside the foolishness that blames banks for the subprime meltdown, since the entire banking industry had only about 10% of the business. While we’re at it, forget blaming Fannie Mae and Freddie Mac, since they never guaranteed any subprime loans, and actually lost enormous market share to the “private label” Wall Street mortgage business in the crucial bubble years from 2003 – 2007.

I don’t care if you call yourself a bank, an insurance company, a mortgage bank, a Wall Street broker-dealer, or a marching band — if you make residential mortgage loans, those loans will be subject to the mortgage regulations and examination by the mortgage regulator.

If some hedge fund wants to claim they are really in East Timor and not Connecticut, then they should be able to make all the mortgage loans they want to Timoreans, secured by East Timor properties. If they want to lend to people in the US secured by houses in the US, they should be subject to US mortgage rules, period.

If you write insurance policies in any form with a US insured counterparty or customer like a bank or pension fund, then the US insurance regulators can look over your books. Calling yourself a “savings bank” and the insurance contract a “derivative CDS contract” under the Commodities and Futures Modernization Act with no disclosure, no regulation and even no reserve capital just doesn’t cut it. AIGFP proved that, and we’ll be paying for their cupidity (and their bonuses) for a couple of generations.

If you sell stocks and bonds to individuals, then the new consumer protection replacement for the SEC looks at your stock and bond operation. I imagine a few of Stanford’s “Antiguan CD” buyers wish our SEC had made sure those bonds he was selling were legit.

The current SEC is hopelessly compromised, given the professional career path every SEC employee hopes to follow. There is absolutely no personal professional future in protecting consumers from unbridled greed at financial institutions “regulated” by the SEC. If you make the wrong enemy in your five-figure job in SEC enforcement, how will you ever get the seven-figure job so many of your predecessors in that division of the SEC got in the past?

So now it’s easy to understand why a multi-million dollar propaganda campaign is cranking up to demonize the messenger, Barney Frank and the message, meaningful regulation.

The Three-card Monte players’ goal is to keep the regulators balkanized and distracted. That way they can preserve those cracks in the system that allowed short term profits to be created by virtually unregulated subsidiaries, offshore trusts, special purpose vehicles and private over-the-counter transactions. Why else would they want a super-committee with no power as their “solution?” Obviously if they can weaken even the existing regulators by setting up turf battles among them, the good times can roll, and then some.

Don’t be surprised to hear your own elected representatives spouting slogans like “keep consumer choice” or repeating unsupported conclusions about how it will make credit more expensive for all of us.

As if anything could be more expensive than several percentage points sucked out of our entire economy accounted as phantom bankster “profits”, paying very real bankster bonuses like an unregulated, uncapped tax on breathing. Credit is the lifeblood of capitalism, and the Vampire Class needs its pools of darkness to keep feeding on us.

Bear in mind that political contributions are the trump cards of politics, and your vote means squat to a Congressman faced with the chance to buy enough TV time to buy thousands of your neighbor’s votes, especially if all he has to do is resist the formation of a Consumer Financial Protection Agency. Besides, it’s proposed by a Congressman that millions love to hate, and it sounds like more Big Government. What could be easier?

The banksters are gathering in Washington, and they brought their checkbooks to buy the best (non)government they can afford.

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