Free Trade: Poisoned Toys for Fraudulent Paper

From GATA (Gold Anti-Trust Action Committee):I love this line in the article: “Poisoned food and toys for fraudulent securities” We get faulty products. They get worthless paper. What could be fairer? Here are some snippets of the article:

Politicians, regulators and financial specialists outside the United States are seeking a role in oversight of American markets, banks and rating agencies in the wake of recent problems related to sub-prime mortgages.Their argument is simple: The United States is exporting financial products, but losses to investors in other countries suggest that American regulators are not properly monitoring the products or alerting investors to the risks.“ We need an international approach, and the United States needs to be part of it,” said Peter Bofinger, a member of the German government’s economics advisory board and a professor at the University of Würzburg. While regulators in the United States have not been receptive to the idea in the past, analysts said that Europe and Asia have more leverage this time around. Washington might have to yield if it wants to succeed in imposing bilateral regulations on state-owned investment funds from emerging economies.“ America depends on the rest of the world to finance its debt,” Bofinger said. “If our institutions stopped buying their financial products, it would hurt.” Banks and investment funds from China to France were recently hit with heavy losses after buying mortgage-related securities and complex financial products originating from the United States. In many cases, investors were caught by surprise because American rating agencies gave the products top ratings, leading buyers to believe there was little risk. International investors are also asking why American banks were allowed to give mortgages to home buyers who could not repay them. The Chinese central bank said Tuesday that it was moving to standardize information disclosure of all asset-backed securities as it expands its own market for these financial instruments. Information about loans, terms and borrowers will need to be included in any new securities that are introduced in China, it said.“ It’s not just the U.S. regulators that failed, though they did fail,” Rosner said. International banking regulators have “thrown the keys to the rating agencies,” which have been left in charge of the safety and soundness of bank capital, insurance and pension money.
Free and fair trade: Poisoned food and toys for fraudulent securities | Gold Anti-Trust Action Committee
August 31, 2007

There’s little doubt a major part of the problem has been that foreign banks and institutions have been buying these products almost mindlessly, based on rating agency risk assessments that were absolutely wrong. The major fault with the global credit crunch between banks now is that no one knows where the default risk really lies.

Question: When you get a $20M bonus for selling CDO’s, but they all go bad and help a create a global credit morass, do you have to give your money back?

Answer: Of course not. But governments will step in and help clean up your mess.