Wall Street's Most Exquisite Financial Innovation: Fraud
Yesterday an irritated Paul Volcker scolded top bankers for complaining that regulation hampers financial innovation. Today, Reggie Middleton takes exception to Wall Street’s concept of financial innovation, and instead recasts it as “fraud innovation.”
From the Boom Bust Blog:
“Innovation, in and of itself, is a very good thing. The issue currently at hand is that it was not financial innovation that got us into this mess. It was fraud innovation. Financial engineers attempted to create methods of circumventing regulations, laws, prudent risk management, common sense and mean market returns. For instance, taking $100 million of junk status mortgages and creating $300 million of so-called AAA exposure out of it (MBS, CDO’s, CDO cubed, credit lines supporting CDO’s, CDS protecting the CDO exposure. etc. – all from a simple mortgage that no one thought would be paid in the first place). That is not innovation, that is called LYING! It was thinly veiled fraud. This lying, in turn, was labeled “innovation”, which it absolutely was not, and the moniker has been carried on in the media ever since.
“Innovation is the personal computer! Innovation is the smart phone! Innovation is mapping the human genome! Innovation can be found in stem cell research! Innovation is discovering new ways of human learning and social interaction. All of these examples of innovation make society more productive, and more efficient.”
Middleton draws a distinction between unhealthy and healthy innovation… and it turns out to be fairly clear on which side creating toxic assets and causing financial meltdown falls. The full details are available from Reggie Middleton’s Boom Bust Blog in his post on financial innovation versus financial fraud.