Who Do You Trust?

I walked 47 miles of barbed wire,
Used a cobra snake for a neck tie.
Got a brand new house on the roadside,
Made out of rattlesnake hide.
I got a brand new chimney made on top,
Made out of human skulls.
Now come on darling let's take a little walk, tell me,
Who do you love,
Who do you love, Who do you love, Who do you love.

-Bo Diddley, 1956

"Who do you love?" is a universal question, but I wish someone wrote as good a song called "Who Do You Trust?" It was the Blues Project who got me into this one, although versions by Ronnie Hawkins, Tom Rush, the Yardbirds, Quicksilver, the Dead, The Doors, and eventually Patti Smith and Jesus and Mary Chain all helped make the impression on me that this was one of the greatest songs of all times. If we have to wait for Lady Gaga to come up with something as good... well, Wall Street will own whatever they don't already own.

Yesterday the McClatchey papers ran with an exposé by Kevin Hall: "How Moody's Sold Out Its Ratings-- And Sold Out Investors." Instead of protecting the public, they conspired with Wall Street (and the politicians who turned a blind eye for the hefty campaign donations from the "financial sector," a nice way of saying the organized crime rings that run Wall Street). Last July the SEC "issued a blistering report on how profit motives had undermined the integrity of ratings at Moody's, Standard & Poor's and Fitch Ratings. Basically the ratings agencies thrived on the profits that came from giving the investment banks what they wanted, and investors worldwide, including pension funds and university endowments, "gorged themselves" on bonds backed by U.S. car loans, credit card debt, student loans and, especially, mortgages, the stuff that later came to be known as "toxic assets."

As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.

A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

As Congress tackles the broadest proposed overhaul of financial regulation since the 1930s, however, lawmakers still aren't fully aware of what went wrong at the bond rating agencies, and so they may fail to address misaligned incentives such as granting stock options to mid-level employees, which can be an incentive to issue positive ratings rather than honest ones.

And Congress still hasn't done squat. Or that's exactly what Congress has done: squat. Are they all crooks? Last week we took a look at the members of the House Financial Services Committee who take thinly veiled bribes from the financial sector-- basically all 73 of them with the exceptions being Maxine Waters (D-CA- the only member with the ethics to not accept any money from the sector the committee oversees), Ron Paul (R-TX), Steve Driehaus (D-OH), Keith Ellison (D-MN), Mary Jo Kilroy (D-OH), Frank Lucas (R-OK), Carolyn McCarthy (D-NY), Alan Grayson (D-FL), Adam Putnam (R-FL) and Al Green (D-TX). None of the others should even be allowed to vote on matters of reform. But they do-- and as Huffington Post reported yesterday, "two congressional committees in charge of drafting legislation to regulate derivatives have quietly killed a provision that would allow the Federal Reserve to police the complicated financial transactions."

In July, the Obama administration sent a proposed bill to Congress requesting that the Federal Reserve be given authority to oversee those aspects of the financial system that posed "systemic risk"-- in short the kind of firms and activities that could bring down the entire financial system. It would be up to the Fed and other federal regulators to determine what constituted "systemic risk." The trading of derivatives, essentially contracts that can act as insurance against a future event or as just a simple bet, were part of the package.

Derivatives brought down the Wall Street investment banks Lehman Brothers and Bear Stearns and nearly caused insurance giant AIG to go belly up. The reason why they nearly brought down the entire financial system is because every major financial firm and bank were tied to them through derivatives deals. They were all interconnected. But there wasn't a single regulator looking at that. Rather, individual government regulators-- both state and federal-- were overseeing their own individual part of the pie, instead of the whole thing. Obama's plan is an attempt to change that.

In its white paper announcing its detailed plans to overhaul financial regulation, the administration explained how derivatives led to the economy's near-collapse, and why the Federal Reserve would need additional power over them:

"Through credit derivatives, banks could transfer much of their credit exposure to third parties without selling the underlying loans. This distribution of risk was widely perceived to reduce systemic risk, to promote efficiency, and to contribute to a better allocation of resources," the administration said.

"However, instead of appropriately distributing risks, this process often concentrated risk in opaque and complex ways. Innovations occurred too rapidly...for the nation's financial supervisors.

"The build-up of risk in the over-the-counter (OTC) derivatives markets, which were thought to disperse risk to those most able to bear it, became a major source of contagion through the financial sector during the crisis," the administration said. "We propose to enhance the Federal Reserve's authority over market infrastructure to reduce the potential for contagion among financial firms and markets."

Derivatives, the administration said in its draft legislation, "may also concentrate and create new risks and thus must be well designed and operated in a safe and sound manner. Enhancements to the regulation and supervision of systemically important financial market utilities and the conduct of systemically important... activities by financial institutions are necessary to provide consistency, to promote robust risk management and safety and soundness, to reduce systemic risks, and to support the stability of the broader financial system."

Congress' single most corrupt committee, the House Agriculture Committee (a veritable Blue Dog Caucus meeting), acted on Friday on behalf of their bankster donors. They "revised" the Obama proposal to make it bankster-friendly-- i.e., toothless. Illinois Republican crook Judy Biggert did the same thing in the House Financial Services Committee. So again, who do you trust?

On a not unrelated matter, the PCCC is asking, this morning, if Harry Reid is someone we can trust, or someone who will sell us out to his corporate donors. I'm hoping for the best and we'll know soon enough.