Pay Attention Folks, It's In Your Face


By Karl Denninger

or not, if you wish…

“There was massively too much leverage within the financial system,” Breeden said at a Bloomberg Link Boards & Risk Conference in Washington yesterday.

And who asked for that “massively too much leverage”? 

Hank Paulson, who was subsequently promoted to Treasury Secretary and was thus able to cash out his entire position in Goldman Sachs without paying a nickel of tax, and did so “just in time” to avoid the impact of the meltdown.

 “Regulators had the authority to control that and eliminate it. We can keep passing laws, but if the regulators don’t have the backbone to enforce the rules and to be realistic, then that’s a different problem.”

Regulators have acted in collusion with the “regulated” to lie – an act that on its face meets the definition of “bank fraud”, specifically in the case of IndyMac which was allegedly (according to the OTS’ OIG report) backdating deposits with knowledge of OTS examiners.

What’s even worse is that those same examiners were employed during the S&L crisis by the government and did the same thing then.

We have a literal thirty year history of “regulators” not only not regulating but being in bed with (in some cases literally) the regulated and conspiring with them to break black-letter laws and regulations.

Regulators need to have the courage to make banks smaller, and less profitable, Breeden said.

The law needs to be changed to:

  • Provide for criminal sanctions against regulators who fail to regulate and


  • Provide for a private cause of action against all members of a regulatory body that fails to regulate for any harm suffered.  This means that in the case of The Fed, for example, recourse must extend to every bank in the system should The Fed fail to meet its mandates.
  • The same problem is why we have a spewing oil well in the Gulf.  MMS rubber-stamped well changes without engineering justification, which proved to be the proximate cause of the well control failure.  MMS’ job is to regulate, and instead they were polishing the knobs of BP executives who wanted a “faster and cheaper” solution to an engineering problem – irrespective of the fact that it was both less safe and, if the testimony yesterday is to be believed, in violation of good engineering standards for what was being done.

    MMS approved the permit changes anyway.

    This is no different than Greenspan retroactively lobbying to make legal a merger he approved knowing it was against the law, with that retroactive approval coming in the form of Gramm-Leach-Bliley and the destruction of the Glass-Steagall act.

    It is no different than Hank Paulson going to the SEC and “asking” for the leverage limits to be removed from investment banks.

    It is no different than the SEC and FBI refusing to investigate and prosecute massive securities and bank fraud in securitization markets.  Specifically, hundreds of billions of dollars in paper was sold claiming that every mortgage was taken with a good recordable deed held in trust, in when in fact many of them were endorsed in blank which is unlawful to hold in a trust in most states, including the states where most of those securitizations are filed!

    It is no different from OTS conspiring actively with IndyMac bank executives to backdate deposits, thereby making the bank’s balance sheet look healthier than it really was.

    And it is no different than Tim Geithner, Congress and others threatening FASB to force them to allow banks to literally lie about  current values of assets – that is, to claim “value” that does not, at present, exist.

    The economic mess we are in now is not an accident, just as the BP blowout was not an accident.

    Both occurred due to the willful and intentional misconduct of public officials who are immunized from prosecution and civil suit as a consequence of being government employees and despite now having the consequences of such failure in our faces we the people continue to refuse to demand that both sanction and a private right of recovery against said agencies and individuals be written into these regulatory statutes right now.

    Until this changes there will be no effective “reform.”