If we can remember back to August of 2007, back before Obama was on the job (though equally loved and dismissed), we can mark the beginning of the end of the financial period with the instability found in two mortgage funds managed by the now defunct Wall Street firm of Bear Stearns.
The funds' investments were beginning to lose value and executives at Bear struggled with the question of how much support they should give to prop up the funds and maintain reputation. Merrill Lynch, ever shortsighted, stepped in to demand collateral and things deteriorated even further.
The funds collapsed and were the first domino in a series to tilt the financial industry on its side. Two fund managers were arrested almost a year later, Mathew Tannin and Ralph Cioffi. Lawsuits quickly followed, including some by large banks that claimed to have been defrauded.
The government in these situations often looks for quick action and to make an example. The desire is to appease the average citizen who is usually outraged at processes they don't fully understand and have preconceived notions about. In the collapse of the home mortgage market and the related financial meltdown, the quick assumption by the man on the street is that none of this would have occurred if not for major corruption by someone else; that corrupt someone worthy of blame is usually highly paid, and entirely worthy of whatever blame can be tossed their way.
Which brings us to this week. It was a very happy week for Ralph Cioffi and Mathew Tannin when a jury of not quite their peers (economically speaking), did not find the government's case against the two men conclusive. Among other things, the government attempted to present email and other conversations in a contextual light that rather dispensed with... context. Some of the email messages that seemed to implicate the fund managers when taken in short quotes, proved to be saying something else when taken in full.
Complexity. The desire of people to reduce everything down to simplicity is the very ingredient that will keep practical reform and change from occurring. Rather than show trials and putting perceived criminals on parade, the real effort needs to be made in Congress, with financial reform that both allows for creativity but punishes reckless risk, consumer fraud, and extreme leverage by firms that could not otherwise avoid collapsing the system if mathematical risk models prove inaccurate.
The public looks for the trials instead of getting engaged over reform at the policy level, and too easily falls under the spell of those politicians pushing a free market mantra of laxity. Without meaningful regulation, we run the risk of killing capitalism as we know it. We applaud the jurors for not looking for easy and inaccurate justice.
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