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On the Financial Frontline

by Knight Allen, NSC Director of Legislation
Published on  June 14, 2012 - reprinted with permission

     Did any of you catch the PBS Frontline program on the financial crisis?  It ran on two separate nights, two hours each.

    If it wasn't the most comprehensive review of the history of the financial collapse it certainly has to be one of the top two or three. With four hours they had time to delve into lots of corners that weren't covered in depth by the general media.

    I must admit I approached the program with a certain amount of skepticism. It is after all PBS/Frontline, institutions that can hardly be defined as dens of capitalist passion. Nonetheless, Frontline has done good work and I thought in four hours that they could do a well-balanced report - which they most certainly did.

    Two things jumped out at me, putting aside the fact the Glass-Steagall act should never have been repealed because that's what kicked off the first domino allowing all the other nonsense to happen.

    First were the interviews with some incredibly bright twenty somethings who had basically just gotten out of college armed with computer skills unlike anything Wall St. or Banking had ever seen. In the finance business they're called "quants." One of them worked at JPMorgan Chase (JPM) and she and her colleagues came up with these new-fangled instruments that seemed like perfectly reasonable hedges against risk. JPM put them into place and they worked fine until the rest of the industry got hold of them and went nuts. These are the types of derivatives (and they're still out there) Warren Buffett wound up calling "weapons of financial mass destruction”. To JPM's credit they saw what was happening and refused to go along which is why the bank had such a high standing (the recent $2+ billion loss is another story). What was really funny (in a twisted way) was the dismay shown by the JPM kid about what happened. It was as though: she just couldn't believe that she turned out to be Dr. Frankenstein who had unleashed this financial monster on the world and had absolutely no control over it and, of course, no responsibility for it.

Ah, Wall Street.  Isn't it grand?

    Another item that really caught my attention was a crucial meeting presided over by Mr. Obama in which two diametrically opposed solutions to the financial crisis went at it hammer and tong. The combatants were Paul Volcker and" Treasury Secretary Timothy Geithner. It's important to note neither of these men were supporting letting the banks go down. The debate was about how much of the cost to save them should be borne by the American people vs. the banks themselves.

    Mr. Volcker took the position known as "moral hazard", meaning the banks got themselves into the mess and they should pay a price in terms of their balance sheets to get bailed out. Obviously, there was no intent to destroy the banks but impose on them a cost for their recklessness? Absolutely.

   Mr. Geithner on the other hand took the position that the entire world financial system was on the verge of imploding and the world had to know the US banking system was going to be made whole. Anything less would be disastrous.

    Mr. Obama weighed the two positions and decided in favor of Mr. Geithner. If you want to give the benefit of the doubt you could say it was a very tough choice and that he made it reluctantly but, bottom line, he chose Wall Street over Main Street.

    It was an historic example of socializing risk and privatizing profit and the American people are still paying the price for it today.

Kudos to Frontline.   If the show gets re-broadcast I urge you to take the time to watch it.

  Knight can be reached at: