Oct 6, 2008
In 2004, five members of the Securities and Exchange Commission (SEC) met with representatives of the five biggest investment banks – Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley. In this meeting, ignored at the time by both the Wall Street Journal and the New York Times, the SEC agreed to reduce the amount of assets the big investment banks would be required to hold in reserve to guarantee their debts. They did so with no further examination of the banks’ financial condition.
The investment companies were quick to take advantage of the decision, borrowing heavily to speculate on ventures like mortgage-backed securities. Bear Stearns, for example, sharply increased its debt to asset ratio to 33 to 1. The others were not far behind.
The head of Goldman Sachs at the time of the meeting was none other than Henry Paulson, the man George Bush appointed Secretary of the Treasury in 2006. Paulson recently engineered the 700 billion dollar bailout bill – simply another way to allow the Wall Street companies to expand their debt!
So why did the big banks roll up so much debt so fast? One of the commissioners, Harvey J. Goldschmid, recently said, “We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing. Letting the firms police themselves made sense to me because I didn’t think the SEC had the staff and the wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson.”
It’s true, and it always has been, that the capitalists have an interest in not creating a global economic crisis. Unfortunately, they compete with each other for profits every day, and with or without regulations, they take any risk necessary in an attempt to surpass their competitors. And that trumps capitalist “self-discipline” any day.
Of course, they know they can count on the government to step in with hundreds of billions in dollars of taxpayer’s money to bail them out when their risky ventures go to hell in a handbasket! No matter who’s running the government, Democrat or Republican.