If Murder were Legal would you Commit it?

I have been going back and looking at reports on the collapse of Lehman and one of my favourite was an editorial by one William D. Cohan in the NYT on March 11,2009. The context is on how the CEO's of the major firms were all happy to make huge and risky bets on the manufacture and sale of MBS because "that's where the money was".

The article goes on to praise Goldman, stating that although they weren't saints (because they too were big in MBS) that they got out of the game in 2006 and then cleaned up by selling these securities short.

Oh, so they got out of the business in '06 and started to short MBS? Funny that the last Abacus deal was launched around April '07.

Well Mr Cohan was right-they weren't saints. But he was wrong on what they were doing.

Fast forward to an editorial yesterday by Mr Paul Krugman. He calmly states that "We've known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value." He goes on to say "This practice, however, while arguably reprehensible, wasn't illegal."

I am surprised at Mr Krugman's calm statement that "we've known for some time". Like how long Mr Krugman, and who is the "we"? I think the investors in ABS CDO's, despite the caveat of "buyer beware" really didn't think, let alone know that the investment banks were selling them securities that they hoped would plunge in value.

Whereas I maintain that customers should be aware of what they are buying and what the potential ramifications of adverse market movements could be on their purchases, I am at a loss to see how selling securities that you have created with the expectation/intention to fail is legal.

The fact that a bank can short securities to a customer with the view that they can buy them back more cheaply at a later date is understood to be a viable part of the secondary market. Putting a value on a security is what banks and investors do. They don't always agree-that's what makes a market.

But the introduction of planned obsolescence in a new security-that takes free market theory beyond the pale in my book.

Financial Regulation should not be a question of your political affiliation- pyramid schemes, shell games, racketeering-these are all illegal on Main Street. Why not on Wall Street?