Join the Fool as we assess blame for this financial meltdown -- March Madness bracket style! Below is one of eight first matchups you can vote on … enjoy!
The case for credit derivatives, by Dan Caplinger
In general, when you're looking for a scapegoat, you want to grab the highest-profile person you can find. But with the current financial mess, the real culprits are hiding in the shadows: those who created all those lovely little credit derivatives that still hang over the heads of most financial institutions.
Who they are remains mostly unknown. An article in Portfolio magazine recently discussed the role of a guy named Bill Demchak, currently vice chairman at PNC Financial (NYSE:PNC), who used to work in a group at JPMorgan Chase (NYSE:JPM) that pioneered credit derivatives. But you won't find household names among this group of credit-derivative forefathers.
What you will recognize, though, are the results. Credit default swaps have run rampant, causing panic as their values imply cataclysmic business failures ahead. Just this week, swaps on Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) traded at levels that treat the company as a junk-bond issuer. Some even argue that swap holders are actively pushing for companies from Six Flags to Ford Motor (NYSE:F) to default -- just so their swaps will pay off.
Don't blame Bernanke
I understand that pointing at some back-room invention from Wall Street isn't as pleasing as fingering a leader like Ben Bernanke for the financial crisis. Plenty of my fellow writers at the Fool have mocked Bernanke relentlessly over the years.
But the derivatives that are behind this debacle have been around a lot longer than the three years that Bernanke has headed the Fed. Even if you really want to blame a policymaker, Bernanke's not your best choice. History will show that while Bernanke had the misfortune of being around when the spit hit the fan, the missteps of the Fed under his predecessor, Alan Greenspan, created the environment where Bill Demchak and others could build their financial Frankenstein.
The case for Ben Bernanke, by Anders Bylund
Oh, Ben, dear Ben. You have done more than your share to bring the world economy to its knees.
As the bearded head of the Federal Reserve, you had the power to effectively put a stop to crazy mortgage-lending practices. Just quadruple the Fed interest rate overnight and see how many new loans get written. It worked in Norway and Sweden 15 years ago, but you chose to take the less controversial stance and emulated Japan's Lost Decade instead. Thanks a lot, pal.
But that's not all. Your damage control was a day late and a dollar long. It was a good sign when Lehman Brothers was allowed to fail -- that's capitalism working as it should -- but then the bailout nonsense started. And kept going and going like a pink drum-beating bunny.
You should know better, Ben. More of the Lehman approach and stricter interest-rate policy would go a long way toward fixing what's wrong with the economy. More undeserved life vests to drowning failures like AIG (NYSE:AIG) and General Motors (NYSE:GM) just drag the pain out over many years to come.
Let the failures fail. Let the winners win. You're doing neither with these boneheaded policies, Ben.
Don’t blame derivatives
Blaming credit derivatives is betting on the wrong horse: They may have done the damage, but they are just tools of the trade. It's like burning down your house and blaming Swedish Match for selling you the matches. Remember that guns don't kill people. Chuck Norris kills people. Barring that, people with guns kill people.
And that deadly flow of derivatives that spun out of control could have been slowed down with an ice bath of high interest rates. Let high-interest loans kill the crazy mortgage underwriting, and a lot of lunatic derivatives would never have been born.
Or how about this crazy idea -- regulate how to use these potent and potentially devastating tools? Ben (with the help of the SEC) could have been more direct in calling for change there too, using his influence to change policy. Forcing Citigroup and Goldman Sachs to deleverage a bit could have loaded the derivatives with a few more blanks.
No, don't hate the game -- hate the players. Financial derivatives are wealth creators when used properly, but we let the kids play with a whole matchbox unsupervised.
Check out the Fool’s entire 2009 March Madness bracket here.
