The Financial Crisis (2)

Yesterday, the Financial Industry Inquiry Commission heard testimony from former Citibank CEO Chuck Prince and former CitiBank Director and "Executive Without Portfolio" Robert Rubin.

To describe their testimony as designed to obfuscate, rather than illuminate, would be charitable. Their attempts to claim that they did not understand the seriousness of the situation into which they had stumbled, without actually admitting incompetence - and therefore raising the question as to whether they should return a very large part of their compensation, would have been laughable were the situation not so dire.

Peggy Noonan (www.peggynoonan.com) is a former speechwriter for President Ronald Reagan who now writes a weekly column for the Wall Street Journal (www.wsj.com). Her descriptions of the roots of the financial crisis, and what honest executives should have said yesterday, are so good that they deserve to be repeated verbatim:

"Let's be real. This is what happened the past 10 years. You, for political reasons, both Republicans and Democrats, finagled the mortgage system so that people who make, like, zero dollars a year were given mortgages for $600,000 houses. You got to run around and crow about how under your watch everyone became a homeowner. You shook down the taxpayer and hoped for the best.

"Democrats did it because they thought it would make everyone Democrats: 'Look what I give you!' Republicans did it because they thought it would make everyone Republicans: 'I'm a homeowner, I've got a stake, don't raise my property taxes, get off my lawn!' And Wall Street? We went to town, baby. We bundled the mortgages and sold them to fools, or we held them, called them assets, and made believe everyone would pay their mortgage. As if we cared. We invented financial instruments so complicated no one, not even the people who sold them, understood what they were.

"You're finaglers and we're finaglers. I play for dollars, you play for votes. In our own ways we're all thieves. We would be called desperadoes if we weren't so boring, so utterly banal in our soft-jawed, full-jowled selfishness. If there were any justice, we'd be forced to duel, with the peasants of America holding our cloaks. Only we'd both make sure we missed, wouldn't we?"

About the only thing that Ms. Noonan did not address specifically is the disastrous structure of the Government Sponsored Enterprises - Fannie Mae, Freddie Mac, and too many others - that resulted in the privatization of profit and the socialization of loss. Socialism is bad enough but a government guaranteed hybrid is worse because it creates a culture of excessive risk taking based on one very simple premise: heads we (executives and shareholders) win, tails you (taxpayers) lose.

An essential part of capitalism is the freedom to fail. When for-profit companies become too large to fail, free enterprise is corrupted and capitalism, if not dying, becomes very very sick.