ARTS & FARCES internet

Michael Lewis and David Einhorn have a stunning two-fer op-ed, “The end of the financial world as we know it” and “How to repair a broken financial world,” in last Sunday’s New York Times. The duo points out six of the core problems leading to the current financial crisis.

1. The sacrifice of long-term, collective interests for short-term, individual gain
2. Mismeasurement of corporate risk—either through malice or incompetence—by the credit-rating agencies, who are paid by the issuers of the bonds they rate
3. Reversal of the purpose of the Securities and Exchange Commission (SEC) from protecting investors from financial predators to “protecting financial predators with political clout from investors”
4. The revolving door at the SEC: “If you work for the enforcement division of the SEC you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it”
5. Treasury Secretary Henry Paulson Jr. insisted on US$700 billion to buy distressed assets from banks; when he got the money, Paulson instead overpaid for preferred stocks in the banks
6. Paulson “granted himself the power to dispense unlimited sums of money without Congressional oversight.”

What’s especially disturbing is that not one of these problems have been resolved. No checks or incentives have been put in place to prevent even one of them from happening again.

Lewis and Einhorn offer a series of solutions to the various elements of this mess:

1. Let corporate firms deemed “too big to fail” fail gracefully: nationalize them, let the shareholders take the bath, replace the firm’s management, auction off the good bits, and liquidate the rest
2. Quash Paulson’s pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Banks will then have to account for the actual value of their assets instead of claiming they’re worth what they paid for them.
3. Repair the social safety net
4. Quickly transform the bank bailout into a homeowner rescue program
5. Restore the original Hope Now program so it works as intended, without the banking lobby’s modifications
6. Institute a rational, coherent decision-making process without regard to the stock market
7. Kill the rating agencies: “if public ratings are deemed essential, they should be publicly provided”
8. Regulate credit-default swaps
9. Impose more stringent capital requirements on banks and break up any firm deemed to be “too big to fail”
10. Lock the SEC’s revolving door