Everybody knows the ship is sinking

Everybody knows our economic ship is sinking. Everybody knows who to blame. Everybody knows financial regulations will be necessary and everybody knows who is going to stand in the way.

The Securities and Exchange Commission has leveled charges against America’s most prestigious financial institution, pension funds have been ravaged, personal fortunes lost, millions of homes are in foreclosure, jobs are scarce, unemployment benefits are running out, the president seeks financial reform, the Democrats have drafted legislation and the Republicans are holding fast to their new party platform, “just say no.”

The scheme

Goldman Sachs, according to the SEC, is guilty of fraud, and that fraud cost investors in excess of $1 billion while Goldman Sachs made a profit of about $15 billion for brokering the alleged fraudulent transactions.

Selling mortgage securities is not a violation of the law, but what is a violation of the law is misleading the buyers of those securities by failing to disclose information. What the financial firm failed to disclose, according the SEC, was the fact that the hedge fund they were selling was hand-picked to decline in value. If you were on the inside and knew the mortgages you were bundling to sell would likely fail, you stood to make a hefty profit by betting against them.

The scheme involved knowing who the losers would be. Let’s say you knew the favored horse in a race had come up lame, but you sold stakes in the horse just the same. Meanwhile, when no one is paying attention, you ran to the betting window and placed a bet against the favored horse that you told everyone else would win. In essence, this is what Goldman Sachs did.

According to an ABC news story, “99 percent of the mortgages in the portfolio had been downgraded – an almost perfect failure rate.” Goldman Sachs knew they were selling a lame horse.

Reform Legislation

The Voice of America reports that under the bill drafted by the Democrats, “the U.S. central bank, known as the Federal Reserve, would be empowered to craft and enforce consumer protection rules for large financial institutions. Banks would be restricted in the types of investments they can make, and large financial institutions would be required to contribute to a bail-out fund that would be held in reserve in case of a future meltdown.”

Republicans claim the bill is flawed, which is the same claim they made against health care reform legislation, “it’s flawed.” They claim the establishment of a bail-out reserve fund would serve to perpetuate high-risk financial dealings by large institutions. In other words, forcing big banks to contribute to a bail-out fund, a sort of insurance policy for the American taxpayers, it would force them to make hastier decisions with investor’s money.

This argument doesn’t hold water and leaks like the boat they are riding in. What is wrong with banks providing security to taxpayers? We have to provide security to drive a car through automobile insurance. Does paying for auto insurance cause us to drive carelessly and make hasty decisions?

Republican Senator Scott Brown of Massachusetts suggested that a “pared-down version” of the bill could attract bipartisan support. Isn’t that what they said about health care legislation, and after all the concessions were made didn’t they still vote against it?

According to Dean Baker, from the Center for Economic and Policy Research, the Republicans, “are carrying water for the financial industry,” and he asks why many in the news media are pretending otherwise. The facts about this matter are staring us right in the face; the boat is sinking and everybody knows it.

Banks are not casinos and investors should not be left to spin roulette wheels with their money. All indications point to the mortgage crises as being the iceberg that left the gaping hole in the ship. Financial firms like Goldman Sachs have played a huge part in the sinking of our economy simply by claiming something was worth more than it was and betting against it.