Politicians On The Current Financial Services Situation

Personally, I'm becoming weary of seeing video clips of John McCain and Illinois' junior Senator remarking on the current situation in the financial services sector.

Both candidates are behaving foolishly.

McCain asserted today that he would fire Chris Cox, chairman of the SEC. As if this would actually remedy anything. Earlier in the week, McCain attacked the 'greed' of those 'on Wall Street,' claiming that, if elected, he would fix that problem for good.

As if. I wrote here, in my companion business blog, why that's never going to happen. And you don't want it to happen.

As I pointed out in that piece, few consumers have been hurt by the past two weeks of financial sector upheaval.

Frankly, it is nauseating to watch both candidates attempt to sound as if they know anything detailed about what, for example, AIG actually does. They don't, and they're not going to learn enough in a few hours to make much difference. And neither has access to the information at Treasury, the Fed, or any regulatory agency.

Obama, for his part, blathers about 'not hurting families.' Just what about Lehman running itself out of business is 'hurting families?'

I will, however, note this about the rookie from Illinois. He has been publicly exposed as the third-largest recipient of campaign donations from Fannie Mae, among all sitting US Senators.

That would certainly make him a prime target of blame for what happened with the GSEs.

It brings to mind the history our nation's early financial tussles. In this case, between President Andrew Jackson and president of the Second Bank of the United States, Nicholas Biddle, in the 1830s. Biddle, in a tactic copied by Fannie's and Freddie's management, used his central bank currency-issuance profits to contribute money to members of Congress, in order to buy their votes for supporting the Bank in its fight with Jackson.

Jackson struck back by instructing his Treasury Secretary, Roger Taney (who succeeded two Secretaries who refused to execute Jackson's directive), to transfer all Federal government deposits from the Second Bank of the United States to state banks. This had the effect of draining the 2nd BUS of funding, and led to its demise.

Thus, the tactics by which the heads of Fannie and Freddie kept support on Capitol Hill is nearly as old as the Republic.

It should be noted that two former heads of Fannie who reaped tens of millions of dollars in compensation for what is now seen as wrongful and misleading management- Franklin Raines, former Clinton OMB director, and James Johnson- are prominent in the Democratic party's candidate's campaign.

So, not only has Obama's political fortunes directly benefited from the largess of Fannie and Freddie, but he has placed former CEOs of the former in high places in his Presidential campaign staff.

An imminent post on my business blog will outline my own thoughts on how to attempt to prevent, or at least minimize the recurrence of the behaviors that have led to the current, rapid loss of value in the financial services sector. But, here, for now, I will simply observe that it is almost certain that detailed regulations attempting to get further into the management of financial institutions will not likely work.

As it is, today's Wall Street Journal's editorial by Zachary Karabell explains that the current meltdown of valuations in structured finance instruments has its origin in the Sarbanes-Oxley law. Thanks to Enron's 'creative accounting,' Congress mandated that financial instruments must be marked to market.

When no market exists, problems arise.

Hence, again, the root of the problem is Congress. Its mandatory use of 'mark to market' at all times, rather than something more flexible, to reflect longer term values of securities to be held to or near maturity, is directly responsible for the speed with which firms like Bear Stearns, Merrill Lynch, AIG and Lehman saw value melt off their balance sheets within days.

The last thing we need is two windbags, McCain and Obama, official members of that home of all great windbags, the US Senate, opining on what to do to 'fix' the current financial services sector situation.

Those two, and their 98 colleagues, have done quite enough damage already, thanks very much.