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McCain and Financial Crisis


This has not been John McCain’s finest hour. Does he rail against Wall Street for political effect? If so, it’s demagoguery. But he has a unpleasant tendency to accuse others of corruption. Now I’m no expert on these financial deals but I’ve talked with some who are and as Zachary Karabell observes in this morning’s WSJ, bad accounting rules are a culprit in this panic. 

 After Enron (now that clearly was a matter of greed, corruption, and criminality) the accounting rules were changed to require companies to rate their assets each quarter as if they were selling their companies. Say an investment bank owned a security that consisted of a package of $100,000 mortgages. Let’s assume that there were a thousand of these. If all were paying, the security would be worth $100,000,000. If 20 percent of the mortgages went bad, under the old accounting rules, the security would be worth $80,000,000. But if, at the end of a quarter when a panic has gripped Wall Street about mortgage backed securities, the investment bank, because it can’t find an immediate buyer for the security, is forced to rate that $80,000,000 instrument at zero. Bam. A downward spiral spins even faster and banks and insurance companies start collapsing.

Will all due respect to John McCain (and it hardly needs adding to Barack Obama who wants to “soak the rich”) this disaster is not the result of greed or poor oversight. It’s in large measure the result of an overreaction to Enron.