SEC Approves Rule Designed to Make Wall Street Bankers Act Like Decent Human Beings

Regulators Attempt the Impossible

As a result of the debacle on Wall Street with investment bankers that helped to cause The Great Recession, the Congress passed a comprehensive set of new banking regulations.  One of those regulations was promulgated and approved by the Securities and Exchange Commission.  Here is what the rule did

The rule—which was mandated by the Dodd-Frank financial-regulatory overhaul law—targets the types of conflicts alleged in an SEC case last year against Goldman Sachs Group Inc. Specifically, it would prevent Wall Street firms from betting against, or "short selling," securities they have packaged for one year after the securities are first sold to investors.

The rule also would prohibit a firm from allowing a third party to help assemble asset-backed securities if the third-party would profit from the securities' failure.

Lest anyone be confused, let’s make sure we all understand what is going on here.  The rule prohibits a Wall Street firm from assembling a package of loans and marketing them to investors as great products, while at the same time secretly trading in that same loan package in a way that the Wall Street firm that assembled the package would make money if the loans failed.  In short, a firm cannot sell investments that it created while at the same time it makes money if the investments fail.

The other part of the rule is also aimed at an abuse.  It does not allow an outside firm to pick securities go into a package that is sold to investors and at the same time secretly take trading positions that will pay off if the package fails.

Now what The Dismal Political Economist finds astounding here is that such a rule is needed at all.  The men and women who populate Wall Street are not inherently evil and criminal persons. They mostly grew up in homes with decent values, where one did not take a gun and rob the neighbors, or hijack a truck, or deal in illegal drugs.  They went to good schools, have nice families and in general lead law abiding lives.

Yet they are so lacking in basic decency, so lacking in ethical values, so lacking in the ability to conduct business in an honest and open manner that the government must create rules like the above to prevent them from making money by what are clearly fraudulent  and unethtical practices.  A pessimist would say that with individuals like that operating the financial system on which not only the United States but the world depends upon in order to have an orderly and prosperous economic system, that goal of an orderly and prosperous economic system is doomed.

Actually one does not need to be a pessimist to believe that, one only needs to be a realist.