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UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of ten of America's presidencies and who has edited alternative journals since 1964. The Review, which has been on the web since 1995, is now published from Freeport, Maine. We get over 5 million article visits a year. See prorev.com for full contents of our site

January 16, 2010

TRYING TO GET TO THE BOTTOM OF THE WALL STREET MESS

Greg Kaufmann, Nation - Two days of Financial Crisis Inquiry Commission hearings have me rattled about how little has changed about our financial system and how much is still at risk. . .

For starters, FDIC Chairman Sheila Bair testified that the credit-default swaps market still poses a systemic threat and that even she can't access CDS information to accurately assess financial institutions' exposure.

Bair and SEC Chairman Mary Schapiro were in agreement with Commission Chair Phil Angelides' assessment that the credit rating agencies were "proved to be worthless and remain so today," given that they are paid by the very Wall Street firms who are profiting from AAA-rated securitized assets.

State Attorneys General Lisa Madigan of Illinois and John Suthers of Colorado revealed that not only were their warnings about unscrupulous and predatory lending practices ignored, but that their investigations were actively thwarted by federal regulators who in turn did nothing--under the guise of preemption.

Madigan also described how rate sheets reveal that Wall Street paid mortgage brokers and loan officers more for risky mortgages--with low teaser rates, pre-payment penalties, low- or no documentation--because the consequent higher interest rate paid by the borrower would bring in more income. Wall Street wasn't the victim of bad underwriting that it claims to be; indeed it incentivized it. . .

Schapiro, Bair, and Madigan argued that Wall Street should have "skin in the game" when securitizing assets. As things stand now they sell them with a bought and paid for AAA-rating, and then take their profits even if the underlying assets are worthless. . .

Reforms discussed included a systemic risk council, a consumer financial protection agency, an industry-funded mechanism so that large firms can be broken up and sold off without taxpayer money, greater disclosure of compensation structures, and a single clearinghouse for derivatives like credit-default swaps.


1 Comments:

Anonymous Anonymous said...

What I don't understand is why Wall Street can bundle mortgages and sell these derivatives as AAA rated equity, and yet a homeowner cannot sell their home at a loss and simply declare a loss in capital gain.

Granted, many can't sell them at all, but at least when the market equalibrates at possibly a lower level, people will be more apt to be willing to sell at that lower rate.

January 16, 2010 10:40 AM  

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