In an interview tonight (January 29, 2009) on Nightly Business Report, Congressman Barney Frank, Chairman of the Financial Services Committee, compared solving the credit crisis to fighting a war. He said that in a war, you have the concept of collateral damage: innocent people being inadvertently harmed in the crossfire. On the other hand, he warned that to solve the financial crisis, the public is going to have to get used to the concept of collateral benefit: undeserving people being unjustly enriched by the policies implemented to solve the crisis.
Maybe Barney Frank wants to roll over and concede defeat, but I certainly don’t. Going back to the war metaphor, can you imagine if FDR had said, “Gee, that Hitler guy is one bad ass dude. Fighting him is going to be really hard. I guess we’re going to have to get used to the idea of Europe being under his domination.” Are you kidding me?! Are we really so afraid to tackle a problem head-on and to deal with it appropriately, and in a way that is fair and just to the public?
We have to find the root causes of the crisis and solve them with minimal damage to the public. Credit derivatives are one big part of the problem. If the banks were so poorly managed that they let business unit heads and rogue derivatives traders expose them to countless billions of dollars in losses to hedge funds, why shouldn’t the public have the right to nullify those transactions and send the hedge funds packing? There is a concept under the law called “unjust enrichment,” whereby transactions that are blatantly unfair can be overturned. That’s clearly the case here, and we’ve got to use that concept to nullify these derivatives transactions.
Merrill Lynch reported a $15 billion loss in Q4, mostly related to derivatives losses, and their new parent company, BofA, promptly went to the government for a handout and got one. We have got to be out of our minds for letting that happen, and for letting someone like Barney Frank, who is clearly absent a spine and any measure of ingenuity, represent us.