A question for those more astute about the financial business than I

[Stinky The Clown]

Do the financial people (whoever/whatever they are) have to get approval from the feds before they sell crap like derivatives, and credit swaps, and all the other smoke and mirror shit they've been peddling.

In other words, was lax oversight or a compliant government at fault or were these shitbirds operating unregulated but within the law?

[dkofos]

1. Actually it is both.

[TreasonousBastard]

2. No and Yes. Thank Phil Gramm and buddies for most of that...

but there were times when Greenspan and others could have had better control over things.

[Stinky The Clown]

3. As a very broad statement .... was the creation of these crap securities legal?

[TreasonousBastard]

6. Yes-- here are few, if any, laws regulating the creation of...

new types of securities. Even during the crazed Milkin years the creation of junk bonds and derivitives wasn't why they all went to jail.

Insurance policies and contracts, yes, there's lots of regulation at the state level, but credit swaps aren't considered insurance like your car insurance is.

(The actual insurance companies at AIG weren't involved and were all legal, properly managed and profitable-- it was a London subsidiary that caused the trouble)

[HamdenRice]

7. This is just plain wrong

The laws concerning how new securities are created and issued are voluminous. Junk bonds were a new product in the Milkin years, but their issuance and sale was heavily regulated.

See post 5.

[TreasonousBastard]

8. Not "plain wrong," but admittedly misleading...

since even your post #5 says the quality of the security isn't at issue so you can sell damn near anything as long as you file the paperwork, and certain derivitives aren't considered "securities" anyway.

And, thanks to Gramm and Greenspan, along with a horde of scholars submittng papers talking about how great the derivitive market is, trading is not regulated by any of the exchanges, the SEC, FTC, CFTC, or anyone else. OTC derivitives had little regulation even before Gramm, and Greenspan testified as to the many reasons why it shouldn't.

Back in my insurance days there were memories of things called "wager policies" which became illegal back in the 19th century because they were simply bets placed with no insurable interest. Lots of that sort of thing been going on on Wall Street lately, and the secretive hedge funds were right in the middle of it in the dark of night.

[HamdenRice]

9. It's not just "paperwork"

It's reams and reams of certified financial statements that must be accurate or else the accountants and lawyers lose everything.

I would say that 99.9% of "investors" are too lazy to look one mouse click away from what they are buying.

There is a lot wrong with the system, but the notion that one doesn't know what's behind a security isn't one of them.

[Virginia Dare]

4. Check out the front page of the Washington Post today..

there is a pretty good analysis of that, apparently it was a bit of both, but some woman named Brooksley Born who was head of the CFTC tried to stand up to Greenspan and reign in the derivatives market, and she was shot down.

[HamdenRice]

5. It depends on what they are selling and to whom

One of the biggest bits of disinformation out there, especially in the liberal blogosphere, is that the underlying securities that have caused the crisis are somehow "opaque" or that no one know what's in them or what the banks' exposure is.

If you (actually an investment bank and company) are going to sell stocks or bonds, including mortgage backed securities, to the public, you have to make extensive disclosure of what is backing those securities.

For a security to be sold, it must be "registered" with the SEC. To be registered, the SEC must approve its "registration statement," which consists of a prospectus and massive amounts of financial data. Moreover, the accountants and corporate lawyers who approve the registration statement must "sign" the registration statement, which means that they are liable for non-disclosure or fraud if they "fail to disclose a material fact" or "misrepresent a material fact" about the company that is issuing the stocks or bonds. That's btw why the accounting firm Arthur Anderson was liquidated along with Enron -- they participated in the SEC documents Enron filed and had unlimited liability for false or misleading statements in the SEC filings.

A few times since the financial crisis began, I've posted links to SEC disclosure filings that show the truly massive amount of data that corporations, investments banks and accountants must disclose before they sell stocks and bonds to the public.

On the other hand, the SEC has never, ever regulated the "quality" of any securities. You can sell any dogshit you want on Wall Street. You simply have to state, "This is dogshit," and believe me, many prospectuses come close to saying just that. The SEC regulates quality of "disclosure" not "quality" of securities.

That said, there are exceptions. Securities may be sold in "private" sales, called "private placements" to "sophisticated investors," a euphemism for rich people and institutions. You have to be very wealthy to be qualified to purchase stocks and bonds in a "private placement." The idea is that investment banks and rich people are allowed to rip each other off, but not rip off the public average guy purchaser.

Certain derivatives get around the entire "disclosure regime" by not being defined as "securities."