Monday, September 22, 2008

Goldman Sachs & Morgan Stanley Flee to Protected Regulatory Waters

Over the weekend the last two Wall Street investment houses applied for status as a commercial bank, ending America's long run of stand alone investment banking. What happened in the risky free market? Why did they flee and what scared them so?

Did the slow drip of devalued mortgage backed securities threaten to put the firms under? Or did a surge of something else swamp the corporate coffers? Did credit derivatives play a role? Rapidly rising credit default swaps threatened to drown some firms. The SEC is investigating the trading of unregulated swaps, intended to back similarly unregulated mortgage backed securities.

The Republican spin is similar to our last huge disaster, Hurricane Katrina. Many called poor people stupid for not leaving New Orleans. A Townhall pundit cited the poor taking on high subprime mortgages as the problem. Fortunately, the CNN anchor challenged her, suggesting blame lay all around.

Last week, something blew up. It wasn’t a poor person driving their Cadillac into the offices of Lehman Brothers, Goldman Sachs or Morgan Stanley. The “peace of mind” backing mortgage backed securities went wild. Credit default swaps went through the roof for a number of firms. That stopped credit in its tracks.

Show me a poor person that invested in credit derivatives. You can't. This is an unregulated rich man’s game and it blew up in their faces. However, the taxpayer gets to bail them out, even from those safer waters.