Credibility Trap: Why Wall Street Always Wins

Credibility Trap: Why Wall Street Always Wins

Courtesy of Jesse's Cafe Americain

There is an interesting new book by Jeff Connaughton called: The Payoff: Why Wall Street Always Wins. It describes the lack of the rule of law on Wall Street and the complacency, if not complicity, of the government.

This is the credibility trap, and deep capture. Justice, for some.

Reform is a neglected stepchild, when all serve their own interests first. 

Even the first reform movement, The Tea Party, was bought off and diverted by clever ad campaigns, and became the bullyboys for the monied interests. And Occupy Wall Street was broken by the concerted actions of the government. As the facade of fraud stumbled they turned quickly to force. And the public looked on passively, approvingly, pretending confusion and indifference. What do they want?

At the heart of it are the Banks. They must be taken down, broken apart, their ashes scattered, as was done in the 1930's.

I am deeply pessimistic that corporate America will do the right thing for the country as Connaughton suggests, even to save capitalism from themselves. Big business has never stood for the people, and rarely taken the long view. They are dead souls of the status quo. They are thePax Romana, purveyors of desolation.

"The inability to identify with others was unquestionably the most important psychological condition for the fact that something like Auschwitz could have occurred in the midst of more or less civilized and innocent people. What is called 'fellow traveling' (collaboration) was primarily business interest: one pursues one’s own advantage before all else and, simply not to endanger oneself, does not talk too much. That is a general law of the status quo." 

Theodor Adorno

As always, freedom languishes, when the people act foolishly, or not at all. Until things get bad enough, and they do something monumentally stupid by giving power to their oppressors in a fit of fear and reckless anger.

"What I worry about is that when problems are not addressed people will not know who is responsible, and when the problems get bad enough — as they might do for example with another serious terrorist attack, as they might do with another financial meltdown — some one person will come forward and say: ‘Give me total power and I will solve this problem.’

David Souter, US Supreme Court Justice

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"Most damningly, Connaughton writes about something he calls "The Blob," a kind of catchall term describing an oozy pile of Hill insiders who are all incestuously interconnected, sometimes by financial or political ties, sometimes by marriage, sometimes by all three. And what Connaughton and Kaufman found is that taking on Wall Street even with the aim of imposing simple, logical fixes often inspired immediate hostile responses from The Blob; you’d never know where it was coming from.

In one amazing example described in the book, Kaufman decided he wanted to try to re-instate the so-called "uptick rule," which had existed for seventy years before being rescinded by the SEC in 2007. The rule prevents investors from shorting a stock until the stock had ticked up in price. "Forcing short sellers to wait for the price to tick up before they sell more shares gives a breather to a stock in decline and helps prevent bear raids," Connaughton writes.

The uptick rule is controversial on Wall Street – I’ve had some people literally scream at me that it doesn’t do anything, while others have told me that it does help prevent bear attacks of the sort that appeared to help finally topple already-mortally-wounded companies like Bear Stearns and Lehman Brothers – but what’s inarguable is that Wall Street hates the rule. Hedge fund types or employees of really any company that engages in short-selling will tend to be most venomous in their opinions of the uptick rule…

Similarly, when Kaufman tried to advocate for rules that would have prevented naked short-selling, Connaughton was warned by a lobbyist that it would be "bad for my career" if he went after the issue and that "Ted and I looked like deranged conspiracy theorists" for asking if naked short-selling had played a role in the final collapse of Lehman Brothers. Naked short-selling is another controversial practice. Essentially, when you short a stock, you're supposed to locate shares of that stock before you go out and sell it short. But what hedge funds and banks have discovered is that the rules provide "leeway" – you can go out and sell shares in a stock without actually having it, provided you have a "reasonable belief" that you can locate the shares.

This leads to the obvious possibility of companies creating false supply in a stock by selling shares they don't have. Without getting too much into the weeds here, there is an obvious solution to the problem, which essentially would be forcing companies to actually locate shares before selling them. In their attempt to change the system, Kaufman and Connaughton discovered that the Depository Trust Clearing Corporation, the massive quasi-private organization that clears most all stock trades in America, had come up with just such a fix on their own. Kaufman recruited some other senators to endorse the idea, and as late as 2009, Connaughton and Kaufman were convinced they were going to get the form. "I said to Ted, 'We’re going to change the way stocks are traded in this country.'"

But before the change could be made, Goldman, Sachs issued "data" showing that there was "no correlation" between naked short selling and price movements. When Connaughton asked an Isakson staffer what the data said, the staffer, intimidated by Goldman, replied, "The data proves we're full of shit." Connaughton looked at the data and realized instantly that it was a bunch of irrelevant gobbledygook, even firing off an angry letter to Goldman telling them the tactic was beneath even them.

But Goldman’s tactic worked. A roundtable to discuss the idea was scheduled by the SEC on September 24, 2009. Of the nine invited participants, "all but one" were for the status quo. Connaughton expected the DTCC representatives to unveil their reform idea, but they didn’t:

"Afterwards, I went over to [the DTCC representatives] and asked, "What happened?" Sheepishly, and to their credit, they admitted: 'We got pulled back.' They meant: by their board, by the Wall Street powers-that-be…"

Matt Taibbi, A Rare Look At Why the Government Won't Fight Wall Street

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