Something to keep watch on out of the corner of one eye–investigation of the financial crisis

Nothing much done so far…

To me anyway, one of the most striking aspects of the current financial crisis has been the lack of interest–so far–in investigating and prosecuting any possible illegal activity by banks or bankers that ended up putting us in the weakened financial condition we now find ourselves in.  Why has no one been held accountable?

Areas of possible investigation are numerous.  Who, if anyone, for example, falsified loan applications that allowed unqualified borrowers to purchase houses they couldn’t pay for?  What supervisors encouraged the process?  What did the people know who created the derivatives that exported the problems to other institutions?  What did they tell the counterparties?

How did the financial industry accumulate such large off-balance sheet liabilities of very low quality, in what seems like a large-scale repeat of the Enron debacle?

Who inside Bank of America decided to withhold the truth about Merrill Lynch’s weak financial condition from shareholders who were voting on the proposed merger?  Why was the SEC so eager to brush this under the rug?

How could Bear Stearns file a 10-K for 2007 showing $60+ in book value and be insolvent a few months later?  What about Lehman?  AIG?

…in contrast to the junk bond scandal

In the junk bond of the late Eighties, in contrast, Michael Milken was quickly called to task.  Prominent portfolio managers, if not jailed, were at least removed from their positions and barred from the investment industry.

The public wants an accounting…

Although they may not be able to cite details, the average citizen realizes that there is something wrong if millions have lost their jobs, their houses and their savings, yet the bankers who caused the problems are not only still employed but enjoying record paydays.  It isn’t that they’re rich that bothers people–after all, no one is angry at Bill Gates or Sergey Brin–but that the bankers have abused a semi-monopoly position to do untold economic harm to the country, yet they’re riding higher than ever.

People also can’t help but notice, as Robert Reich recently pointed out, that the banking lobby has contributed close to $400 million to Congress over the past year, most of that to legislators directly involved in policing the banking industry.  And if an incumbent’s constituents somehow aren’t aware, a challenger will be more than happy to enlighten them.

…and the political winds may be changing

The SEC, once apparently eager to cover up the BofA/Merrill affair, has recently filed additional charges.  And it has just begun a probe of collateralized debt obligations.  Why the interest now?

My guess is that Congress, deeply responsible for the financial crisis on both sides of the aisle, hoped that public anger would dissipate.  But it hasn’t.  If anything, the large profits banks are now making, and the huge bonuses they are paying to executives whose ineptitude caused the banking collapse, have fanned the flames of public discontent.

So the calculus of risk has changed.  Better to take the chance of being implicated through an investigation than to have the near-certainty of voter retribution if they do nothing.

Why this may matter

Throughout my career, I’ve thought that politics had a lot in common with sports.  That is, both are interesting, entertaining, but basically irrelevant for investors.  Under most conditions, gridlock would be the most probable, and also the best outcome one could hope for.

I now worry that as a country we’re deeply enough in debt that we can’t afford to suffer much more damage at the hands of Washington.  We could also get wholesale turnover in Congress next November if people stay (justifiably) angry about lack of action to prevent a new financial crisis, with unpredictable consequences.

Would we be better off with a bunch of new people who think natural resource companies should be nationalized so that somehow that would lower prices?  What would we do if we ended up with a crowd that thought we should let neighbors die of starvation/lack of medical care because their great grandfathers made a declaration of independence from Europe (thereby entering a pact with the devil).  I don’t know.  And uncertainty breeds lower prices.