Despite their atrocious management and performance, the big banks have been propped up, enabled, and enshrined in their competition-thumping oligarchy by Washington. In a pleasant surprise, the court is allowing the states to brandish a whip hand to rein them in.

Too big to contain, probably, are the derivatives, especially the synthetic (also known as naked) CDS that crashed us last fall. Warren Buffett, among others, thinks that this financial plutonium can't be controlled and that it should be outlawed, as it was until 2000. But a new ban may already be off the table. Barney Frank, usually the most avid reformer on derivatives, pointedly left out a ban on naked CDS deals in the proposal he submitted in early October. The Obama team wants default swaps cleared by a "central counterparty"—in other words, on a public exchange. That way, we're told, if the slaughter starts, we'll see it and stop trading before it's too late.

It's not enough. Naked swaps are the equivalent of financial gang rape. As soon as hedge funds, investment banks, and big-time short sellers sense that a bond is flailing, they can pile on with as many derivatives as they like to make millions in what are, in effect, side bets in a craps game. Today, electronic trades take five milliseconds, according to the New York Stock Exchange. The carcass will be picked clean long before any bureaucrat gets regulatory authority to shoo away the vultures. The central-counterparty market applies only to standard, rather than "customized," derivatives. So if you're savvy enough to put a few bells and whistles on your swap, you can still push it through the dark digital over-the-counter alleys, far from the gaze of prying regulators. We're just as vulnerable as we were in the dizzy days of AIG, JP Morgan, Lehman, and Bear Stearns.

Chris Whetzel


Author James Lieber is a lawyer whose books on business and politics include Friendly Takeover (Penguin) and Rats in the Grain (Basic Books). His previous story on the Wall Street meltdown, "What Cooked the World's Economy?," appeared in the Voice this past January.

The truth about naked swaps is that they're as sordid as they sound. To be clear: They're the costliest, riskiest form of gambling on earth. Only a few economic patricians can play: hedge funds, banks, pension funds, insurance companies, and governments. But, as we learned the hard way in 2008, just about everyone, including the system itself, loses when they win.

Geithner told Congress that the government was "blindsided" last year by the explosive risk of the derivatives market, but can regulate it now. That's wrong on both counts. Everyone in Washington knew or should have known the risks in 2000, when the government stopped regarding these complicated bets as felonies and started calling them "investments." Then, as now, the main argument was that if American markets won't clear such swaps, someone else will. But two wrongs don't make a right; nor do a trillion. Plus, our government takes the opposite stance on, say, bribery in foreign countries by Americans, whom it prosecutes vigorously despite the fact that other nationals could pay the bribes if our companies don't. In fact, the DOJ is emphatic that bribery will stop only when people who pay bribes go to jail (which they do).

Washington's soft-core approach to the epic financial fraud that caused the crash remains hard to understand. As Bill Black says: "When you don't prosecute, things don't get better."

They're not getting better or safer. Credit is tight as a tick—especially for consumers. The financial industry is expanding its use of new and exceedingly complex derivatives. The mortgage market, the source of the raw material for mayhem, remains unchecked. The FBI said this summer that mortgage fraud is "rampant" and growing. Suspicious-activity reports (known as SARS) rose from 47,000 in fiscal 2007 to 63,000 in fiscal 2008, which ended last September at the height of the crisis and its publicity, and now such reports are on schedule to exceed 70,000 for fiscal 2009. A growing source of exploitation involves reverse mortgages marketed to the elderly.

People want justice. They've lost savings, homes (or the value of homes), jobs, and retirements. Foreclosures continue to rise. People can't believe that the mega-grifters who pulled off mortgage, securitization, and derivative frauds walk the streets with lined pockets. And the venal "experts" who issued bogus ratings that deodorized subprime cesspools should be in the dock. But it almost seems as if Bernie Madoff's 150-year sentence for a scheme that had nothing to do with causing Wall Street's meltdown is supposed to cover all the crooks, and that we're supposed to be satisfied.

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