Today's news carried two related stories that seem to demonstrate how dysfunctional our government is.

One story was that of the civil lawsuit by the SEC against Goldman Sachs for fraudulently designing and selling securities which were expected to result in huge losses to investors, but huge profits for Goldman and their clients. Let me sum up the high points of the deal in question...

Goldman purchased and assembled large groups of sub-prime mortgages into mortgage-backed bonds, which evidence apparently shows they knew were certain to default. Of course, they took fees for creating and selling those bonds to investors. Then they designed a complicated derivative contract--call it an insurance policy--that would pay off to the owner of that contract when the bonds defaulted. They took more fees for designing and selling those derivatives to another client, a hedge fund. When the bonds defaulted, the investors in the bonds--mostly city and state retirement funds--lost almost their entire investment. But the owner of the derivative "insurance policy" profited just about dollar for dollar in the amount of the investor's losses. Goldman Sachs made millions of dollars, having been on both sides of the transaction. And the way Goldman is organized, a very large proportion of their profits were paid to the people involved in the form of huge bonuses. The SEC is alleging that there was fraud involved, but there is nothing apparently illegal about the transaction.

This happened as the result of a couple of events in the preceding years. Congress got involved, thru their oversight of Fannie Mae and Freddie Mac, to incent those lenders to dramatically loosen their lending standards. Those loosened standards rippled thru the banking industry, resulting in the origination of millions of loans to borrowers who were not creditworthy, based solely on frothy increases in home values. When residential market values declined, the losses imbedded in all those bad loans were revealed.

The actual losses resultant from the bad mortgage loans were actually multiplied several times over as the result of investment bankers and insurance companies creating a variety of derivative financial contracts based on those mortgages and sold to a variety of investors worldwide. So when the decline in home values caused defaults on the underlying mortgage loans, the effect on the owners of the variety of derivative contracts was even worse. There was nothing illegal about what was done by the investment banks and they didn't violate any regulations--there weren't any.

The entire financial system was pushed to the edge of almost complete failure because in 1999, the legislation that required that commercial banks not be permitted to assume the types of high risk businesses and securities that the investment banks were permitted to create was eliminated. That legislation, put in place at the time of the Great Depression in 1933, had been largely effective in protecting the banking system from losses from risky businesses and securites for more than 50 years. Following the elimination of the "separation" legislation, the decade of the 1990's was one where the regulatory system of the Federal Reserve system was purposely diluted by the politicians and appointees then in power. The number of various kinds of derivative financial contracts and products also escalated. But the government passed legislation in the mid-1990's to completely de-regulate any of the derivatives businesses of the banks of investment banks. There simply was no legal requirement for regulation of any of those financial products that ultimately deepened to recent financial crisis by several orders of magnitude.

Another story in today's news had to do with the legislation which has been proposed by both the POTUS as well as the Senate Banking Committee to strongly increase and improve the regulation of banks and investment banks, including the specification of how a few financial institutions who would be deemed "important to the financial system" including how they would be dealt with should it be determined that they assumed too much risk and had become financially unstable. The legislation is reported to describe the process by which such financially-threatened banks would be broken up and sold off. The opponents of the legislation are referring to that part of the legislation as a "bailout", even though no government investment is proposed. The legislation has been discussed for many months, but the bill has reached a point where it will be presented to the Congress for debate and vote. Today's news article said that the Republican leadership in the Senate announced that it would vote 41-0 to oppose any new financial regulation, even before the first committee meeting has been scheduled to discuss and debate the proposed bill.

There are a whole lot of details that can't be presented in just one post on this board. But I ask you--does this completely partisan decision on the part of one of our political parties seem like a reasonable position to take given our experience with the financial crisis and as recently as today, the window into the self-profiting inner workings of the leading investment bank on Wall Street? What they are saying is that no further regulation of the financial industry appears to be needed.

It does not take an advanced degree in finance or years of experience in banking--both of which I have by the way--to see the continued partisan dysfunctionality of our government with laser-like clarity. Our politicians seem to be more interested in winning the argument rather than doing anything that might assure increased stability of the American financial system.