Who Caused the Crisis?

In the flurry of commentary and news reports about the economy this week, here is one point that I hope you didn't miss, from the Big Picture on Thursday:

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley. 

As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."

So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis. 

You couldn't make this stuff up if you tried.

This point may be lost on the average voter, but it is firmly grasped by millions of the pro-business Republicans that John McCain needs to win the White House.

Add to that their disgust at the reckless and seemingly random government intervention in the markets, and you have the makings for a major backlash among a critical segment of the Republicans base this November.

It's no wonder McCain's post-convention bounce this week plummeted faster than the Dow on Monday. Bush has bankrupted this country -- the Republicans have wrecked America -- and the end result for the GOP is a coalition in complete tatters and disarray.

Funny what eight years of plundering by the masters of the universe will do to a country, eh?