Wednesday, November 30, 2011

Corruption or Incompetence; the Economic Effects Seem the Same

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One of the on-going arguments across the blogosphere and even the entire world is whether the economic problems of the last ten years are more related to incompetence or basic corruption. I must say, just the last week has offered plenty of evidence for both views. For example, we had this article from Bloomberg yesterday (Tuesday, November 29) about how then Treasury Secretary Hank Paulson met with his hedge fund buddies and gave them the first class insider information on his plans to place Fannie Mae and Freddie Mac into "conservatorship."

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.

The fund manager says he was shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.


And law professors say that Paulson himself broke no law by disclosing what amounted to inside information.


At the time Paulson privately addressed the fund managers at Eton Park, he had given the market some positive signals -- and the GSEs’ shares were rallying, with Fannie Mae’s nearly doubling in four days.

William Black, associate professor of economics and law at the University of Missouri-Kansas City, can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.

“You just never ever do that as a government regulator -- transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”
So, apparently what Paulson did was not illegal, yet there were and are no controls on Paulson or anyone else receiving this information. But it does smell of corruption. Or maybe Paulson was so incompetent as to believe that he was just sharing gossip with his friends that would harm no one.

Another example of the corrupt or incompetent conundrum was in today's papers. The NY Times had this article on how the ratings agencies missed all the signs of problems in Greece:
In a stern pronouncement, Moody’s Investors Service this week warned of rising prospects for multiple defaults by countries in the euro zone and credit rating downgrades of nations across Europe if leaders should fail to resolve the spreading debt crisis.

When it comes to Greece, critics say Moody’s should have been tougher a lot earlier.

Until two years ago, the ratings agency took a relatively lax approach to growing signs of troubles in Greece, epicenter of the current crisis, even as the country plowed ahead with a borrowing binge that jeopardized its fiscal condition.

Moody’s held off dropping its strong A rating of Greece’s bonds despite growing political turmoil and economic woes through 2009. Investor fears over Greece’s short-term financing needs were “misplaced,” Moody’s said in a report in early December 2009. Twenty days later, after a review, the agency downgraded the nation’s debt, the last of the major ratings agencies to do so.
These are the same credit ratings agencies that rated mortgage backed securities as AAA, helping to cause the financial melt down leading us to the Great Recession/Lesser Depression.

The same ratings agencies that were too incompetent to see the problems with Greece and over-rated the mortgage securities have also been going around down grading the credit ratings of the United States, Spain, and Italy. There is more than a little irony in Standard & Poor deciding to cut the credit rating of 15 of the largest world banks last night. This while the global central banks have banded together to bail out European banks and the Euro Zone. Of course, the stock markets love it.

Meanwhile, British workers are striking against austerity measures, the #Occupy movement continues apace in the US and the 1% continue to be clueless.

Incompetent or corrupt? Or is there a difference?

And because I can:

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