Where Much of the Real Financial Blame Might Lie
Like many of us, I would like to jail those persons who are responsible for the Great Recession.
Most of us know someone who lost his home over the past few years. Many of us are familiar with a family who slipped from middle-class comfort to government dependence. This is intolerable and cries out for justice.
I do not know the names of all those who should be jailed. But I would like to start with North Carolina insurance commissioners present and past - Wayne Goodwin and, if he were still alive, Jim Long - and others like them nationwide.
Most people understand that our recession began when worthless mortgage-backed securities were sold as "Triple A Paper" to banks like Charlotte-based Bank of America, initiated by its subsidiary, Countrywide Mortgage. Those sales were made possible only by something called a "credit default swap." And that is where Goodwin and Long needed to pay attention. They did not. The result was that many Americans lost their future.
So what is a "credit default swap"? Simply put, it is a policy of insurance. The banks or holders of notes purchase the policies to make sure they do not lose money on defaulted mortgages to dirt-poor homeowners. If a homeowner does not pay for his home, the insurance company pays the bank instead. The bank cannot lose unless the insurance company goes broke. And it did.
The problem is that these insurance policies were called "credit default swaps" because they were sold by investment companies, not insurance companies. And selling insurance without a license is a crime.
Insurance companies are regulated. The sale of insurance is restricted to licensed agents and regulated companies because government is supposed to make sure that in case of disaster, insurance companies remain solvent and policy holder claims are paid.
But our Insurance commissioners, as did others everywhere, failed Bank of America, Countrywide and the people. Banks were purchasing and arranging for purchase an insurance policy from companies that were never subjected to the scrutiny that the insurance commissioner should require.
Blatantly selling insurance without a license simply because the policy is called a "swap" is like a barber stating he does not need a license because he is not "cutting hair," he is "trimming" it. Such a barber would either go to jail or be ordered to read Shakespeare. But jailing a Wall Street securities salesman selling worthless paper in Charlotte is not as easy when both salesman and customer contribute to campaigns and employ lobbyists.
Yet that is not the entirety of the problem. As we read here today, credit default swaps are being bought and sold just as if nothing has happened. Goodwin remains oblivious to the problem. And they have expanded. These swaps now insure everything from leases to Greek debt.
Putting aside the Democrat/Republican argument as to whether the underlying cause of the recession was the lack of regulation by George W. Bush or the pressure to lend by Barney Frank, we can all agree that the immediate cause of the recession was a simple Depression Era "run on the bank."
When the homeowners could not pay and banks made insurance claims, the money was not available. Had the swaps been properly regulated as insurance, then the commissioner would have made sure sufficient reserves were available or would have, more likely, shut down the business in North Carolina. This would have led to fewer mortgages, fewer defaults, and, possibly, an easing or, locally, an avoidance of recession.
Of course, some would say this is a federal problem. But where there is federal inaction, state regulators from among the states frequently unite in national lawsuits such as the suit that destroyed tobacco. And the Marlboro Man never caused financial disaster.
It is also interesting that the continued interstate sales of "mortgage insurance swaps" remains an unregulated federal matter; but, the federal government insists that selling interstate health insurance must be outlawed. Blue Cross never caused recession.
As Republicans, we cannot abrogate our responsibility to regulate where regulation is necessary. Where the federal government refuses to act, state officials must act. Or, at the very least, they must join with other states to properly regulate insurance, no matter what a charlatan might call it.
Robert M. Levy is chairman of the Moore County Republican party. Contact him at Law52@prodigy.net.
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