Predictable: Dems Start Looking for Somebody to Blame

Nancy Pelosi's first response to the financial services failure and bailout is to call for show trials. At first glance it looks like neither Lehman Brothers nor AIG did anything illegal, though in Lehman Brothers's case it wouldn't surprise me to discover disclosure failures and fuzzy accounting as things started to go pear-shaped. (The crisis at AIG probably happened too fast for that type of thing.) That was the case with Enron officials, where prosecutors could only find regulatory violations made while attempting to cover up the foundering company.

Even if it turns out these companies did nothing illegal, Democrats will do their best to blame the Bush Administration for not interfering in perfectly legal transactions. For years they championed widespread homeownership and demanded that financial institutions provide risky lending to the working class. They got exactly what they asked for, so of course a panicked search for excuses and blame must follow.

House Democrats plan to aggressively look at the administration’s role in the meltdown over the weekend and to explore further regulation and government structures that would be taken up under the new president.

[...]

"The hearing will examine the regulatory mistakes and financial excesses that led to yesterday's bankruptcy filing by Lehman Brothers," Waxman wrote. "The committee will also explore the impacts of the Lehman bankruptcy on financial markets and the United States economy."

SOX: the Sequel is on the horizon. Congress is never happier than when it is regulating the life out of an industry. How many millions will this "further regulation" cost the financial services industry annually? Companies on the margins will decide to move to more permissive regimes (the UK's Financial Services Authority comes to mind), just as they did after SOX.

It is worth repeating that the authority and scope of financial services regulation comes from Congress. Pelosi's transparent attempts to pin this to the Bush Administration should be met with a hail of pointed questions about her own votes to deregulate banking and her (former) approval of high-risk lending practices to benefit the working class.

Meanwhile, Barney Frank is breathing a great big sigh of relief that his part in the Frannie and Freddie debacle is going unmentioned. Thank God for Lehman Brothers, huh?

Separately, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, plans a forward-looking hearing with economists on Wednesday to "begin a conversation about where we go with the capital markets," a House aide said.

Frank plans "oversight of what happened this weekend with the Treasury and Federal Reserve," and will look at "how bad the capital markets are, and what may be needed."

What may be needed is to stop bailing out these failing companies. I understand that they're "too big to let fail", but we've now removed a key market-based incentive for financial giants. Frannie and Freddie and AIG will not be the last institutions to find themselves in trouble. The top two or three companies now appear to be backed by the government and so look to investors to be less risky and more financially sound than they actually are. Isn't that what got Frannie and Freddie into trouble in the first place?

posted by Gabriel Malor at 10:02 AM

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