classical economics
for analysis,  forecasting
and policy design

Financial Fraud Breakout

FINANCIAL FRAUD THREATENS BREAKOUT
House May Confront Wall Street on Manipulation
By Wayne Jett © January 21, 2010
    Last Friday at a national conference on the approaching “train wreck” of U. S. fiscal default, not one of two dozen assembled academics offered a thought on the significance of financial fraud in the global economic collapse of 2008. They could get an idea by interviewing Rep. Mike Capuano (D-MA), who summed up the reason for Scott Brown’s upset Senate seat win in these terms: “If the White House won’t confront Wall Street, the House should do it for them.”
    To avoid misconception that he and Massachusetts voters are merely upset with bonuses paid to bankers, Capuano said the Obama White House has “played footsies with Wall Street from day one,” and he illustrated his accusation. He chose as a “classic example” the repeal of the Up-tick Rule by the Bush SEC in July, 2007, which permitted much destructive trading, and the Obama SEC’s dilatory failure to obstruct bear raids on publicly traded companies despite a year of dithering over a draft rule.
Better Late Than Never
    Though Capuano is due credit for voicing his charge now, he is late in doing so (as Massachusetts voters attested Tuesday), and calling the problem “playing footsies” is as antiseptic and innocent a description as can be conceived for the obscenities committed against the middle class. Goldman Sachs permitted its big clients to violate the Up-tick Rule throughout the stock market collapse of March, 2000, through October, 2002. Untold billions in illicit gains were taken by pounding down share prices with short sales marked as “long,” and the SEC imposed a mere $2 million fine on Goldman Sachs as a slightly negligent bystander.
    That was in March, 2007. Three months later, the SEC compounded its complicity in the crime by repealing the Up-tick Rule as antiquated. That cleared the decks for crushing home mortgage companies before the end of that year, and then the big financials in 2008. But, hey, there are no crimes or criminals around here, because federal officials of every stripe (and even academics!) see none.
    Add to this scene the manipulation of crude oil prices to strip trillions of dollars out of middle class pockets and to collapse the global economy. All of this and much more is done in dark markets unmonitored by regulators, thanks to Congress and regulators trained to grab their ankles every time investment bankers or short-side hedge fund managers heave into view.
Hitting Clean-up
    Congressman Capuano and others, take note. Let’s tell the whole story straight. The Up-tick Rule, a good one that actually stops short sellers from driving share prices down (not just a price that beats the bid by a penny), ought to be done right now. Wait until year-end and we’ll all be looking at another year of slaughter and November elections from the other side. The reason SEC hesitates is obvious: its new rule must not interfere with Goldman Sachs reaping billions in quarterly profits ($4.95 billion reported Thursday) through its “high frequency trading” and similar “innovative” techniques. Massachusetts voters can guess what HFT really is. Can you?
    The Up-tick Rule is where clean-up begins, not where it ends. Counterfeited shares, meaning shares sold but undelivered except with electronic entries, must be bought in immediately by perpetrators of this naked short selling fraud, or their brokers must buy in for them. The House already knows how to fix the manipulation of crude oil prices, so that should proceed without another week’s delay. These things ought to be broken out of the “financial reform” mish-mash and moved separately.
    Every member of the House and Senate remains silent on these issues at their own peril. Anyone fearful of running against Wall Street should contemplate the wrath of the middle class. Remember, every face in every crowd you see is a member of the middle class, and they don’t like how you’ve been handling these issues so far. ~