Should the Punishment Fit the Crime? (History Lesson Hidden Within)

I like the idea that the well-paid/placed people who have stolen millions (some, billions) from the common people (taxpaying naïfs), who had to trust them to abide by the law and take care to perform their fiduciary duties legally, should pay a commensurate price with that paid by small-time criminals who steal small amounts by comparison. The stock (joke) phrase now seems to be "Steal a little, go to jail. Steal millions, go on TV and pretend to be finding solutions to the problem (of your thievery) as you further enrich yourself and your business partners (as well as ensuring you appear as noble when trying to calm the markets (so you can continue stealing))." After all, if a small-time thief goes to prison for several years for stealing a little, shouldn't business people also go to prison for stealing what is a quantum leap above those paltry amounts? From BK Trader FX (emphasis marks and some editing are mine - Ed.):

It only takes one thief amongst a group of a thousand honest men to destroy all the benefits of a free market system. Every economic transaction is in essence an exercise in trust. I pay you money and you perform a service. But performing a service has a cost. It requires, thought, labor, work. What if I just took your money and performed none of those tasks? Wouldn’t my profit margins be much greater than my competitors? If I could get away with the scam long enough, I could grab all the market share and dominate my sector. Sound crazy? Think AIG selling CDS insurance for $5 premium per $1000 face value with the money entrusted to them by annuity buyers. (Yes I know that is not EXACTLY what they did - that that was the EXACT effect of their actions) Now that some of those bonds are bankrupt they have to pay out $995 in claims which they do not have. Can one even make a moral argument as to why the management of that organization should not be sentenced to life in prison? After all we put away bank robbers for life for stealing as little as $10,000. The crimes of AIG were exponentially greater. The point of this rant isn’t really about my lust for vengeance. The crimes of Wall Street are already water under the bridge. Capital has been lost, lives have been ruined and now it just a matter or recognizing reality. I wrote two weeks that on Wall Street you either eat your losses or your your losses will eventually eat you. Hank Paulson, ever the Goldman Sachser that he is, refused to honor that rule and the end result is a complete and total stock market crash despite his best but misguided efforts to throw good money after bad with TARP. So what should policy makers do now? Recognize the absolute and abject failure of unregulated free market and fix the real problem. Contrary to popular belief unregulated free markets are not always the most efficient solution. Countries that rely on private toll roads and the US healthcare system are just but two examples of utter and absolute failure of free market to deliver a quality product at a low cost to the greatest amount of people - a key measure, I would argue, of our progress as a society. In finance this failure of the free unregulated markets has manifested itself in the vast shadowy over the counter derivatives market for MBS, CDO, CDS and a host of other alphabet soup products whose notional trade value now exceeds $550 Trillion - 10 times the Global GDP. In what now seems like a quaint memory but was in fact the foreshadow of things to come, the hedge fund LTCM nearly brought the financial world to ruin with its reckless trading in 1997. On the other hand in 2005 another hedge fund Amaranth Partners also blew up gloriously on bad energy trades, but its collapse scarcely caused a ripple. What was the difference? LTCM trades were all made over the counter without any supervision or transparency. Amaranth trades were all made on a regulated centralized exchange - the NYMEX - where a careful clearing enforcement system made sure that all the counterparties were paid their due. On Friday, I wrote the following words,”Given these apocalyptic scenarios, consensus is building amongst the G-7 policymakers to centralize the two largest over-the-counter markets – LIBOR and CDS which have come to a grinding halt, as counterparties no longer trust each other and credit is cut off to a trickle. The centralization of clearing for these two key markets (much like equities on NYSE and NASDAQ and futures on CME) would go a long way towards alleviating the fear that has paralyzed these two key markets. Centralized clearing would effectively guarantee counter party risk and provide much better price transparency perhaps enticing bargain hunters to make some bids. Global policymakers however must move fast, as investor confidence is being drained by the moment and markets are unlikely to stabilize and function well without some centralized structure. For FX, the bottom line is that risk on remains the dominant trading theme of the day and high yielders will continue to be pressured until some semblance of order returns.” Next week the markets may well bounce. Carry could rebound from its grossly oversold levels. Traders could breathe a sigh of relief. But none of these cosmetic events will fix the underlying problem of global finance - lack of transparency and security capital. Instead of burning yet more trillions of dollars of taxpayer money, global policymakers should bring in over-the-counter market under an exchange-regulated umbrella - a solution that would be far less expensive and far more efficient for us all.

After all, we don't really need the ending from "The Last Boy Scout," do we?

As the camera descends on the rain-splattered football field, we see a grim, troubled fullback running down field with the force of a locomotive. As he is approached by the opposing team he whips out a gun shoots his would be tacklers on the spot, opening the way to an unfettered path towards the end zone where he promptly sits on one knee, puts the gun to his head and blow his brains out.

And finally there's that much-awaited "Hard Look at the Greenspan Legacy," at which you may want to take a satisfying glance. I rest my (our) case. Suzan