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In the depths of the Great Depression, the American government set up social and financial safety nets to prevent another treacherous economic downspiral and financial panic. The strategy seemed to work: in the years since, recessions and bear markets have been milder. There has been no depression, and panics have been fleeting. But now, a few outspoken economists fear that a depression — a prolonged downturn, accompanied by severe financial distress — is a possibility, if only remote. One reason: those safety nets are severely shredded.

The social safety nets — the entitlement programs set up in the 1930s and their later refinements — are in tatters. The Medicare trust fund will run out in 2019, and the Social Security fund’s reserves will be depleted in 2041. David Walker, former head of the U.S. Government Accountability Office, has been going around the country on Fiscal Wake-Up Tours, warning that the nation is on a financial collision course: there is not enough money to handle coming baby boomer retirements; the Medicare prescription drug benefit plan is a disaster; tax cuts have been irresponsible; the Iraq War is draining available funds; government pensions at all levels are far too generous; and Congress has no budget controls. Walker recently joined a private group trying to educate citizens on the similarities between America today and the Roman Empire in its final years.

The financial safety nets are in tatters too. They were set up to prevent market manipulation and thwart debt-based pyramids. The 1920s was a decade of wild speculation enriching a favored few but eventually wiping out almost all investors. A handful of crooks would create pools to drive a stock up, then bail out when it hit a predetermined peak. They would work similar magic in driving a stock down.

The stock pyramids, facilitated by piles of debt, were the most dangerous. The Van Sweringen brothers built a pyramid of railroad stocks; Samuel Insull had an infamous utilities pyramid. As the stocks crashed and the basic businesses foundered, the debts could not be paid. The pyramids collapsed, exacerbating the fall of the overall market. Viewing one jerry-built debt pyramid, President Franklin Delano Roosevelt called it “a 96-inch dog wagged by a 4-inch tail.”

In this environment, the United States passed rigid securities laws and set up the Securities and Exchange Commission. Its mission was to protect small investors from the depredations of corporate titans and Wall Street. Now the mission (unstated, of course) is exactly the reverse: to protect the titans and Wall Street. One way it’s done is through what San Diego attorney Gary Aguirre, a former commission investigator, calls the “rotating door.” Lawyers work for the agency for several years and then go with big law firms for $2 million or $3 million a year. When they are at the agency, they do dubious favors for the powerful firms representing stock manipulators. For example, John Moores dumped $487 million of stock in Peregrine Systems during the period in which the books were cooked. Evidence shows Moores knew about the phony accounting. Moores hired his personal lawyer, Charles La Bella, to oversee a whitewash by the law firm of Latham & Watkins. To no one’s surprise, it exonerated Moores and put the blame on his underlings. The study was ridiculous, pointed out victims. The SEC official in charge of the Peregrine case blessed the Latham & Watkins study — then went to work for Latham & Watkins.

Three years ago, the securities commission notified Bear Stearns that it intended to bring an enforcement action against the firm for overvaluing $63 million of subprime mortgage–related derivatives. Two years later, the investigation was quietly closed. Gary Aguirre suspects that backroom pressure from law firms killed the matter. If the case had proceeded, the subprime crisis might have been averted, he suggests.

“Fixing the SEC so it can protect investors will not be easy,” says Gary Aguirre, who has returned to San Diego after several years in Washington, D.C. “Powerful interests want the SEC to be just the way it is or even weaker.” Opacity, thy name is Wall Street. “Over the last decade there has developed a second financial market — unregulated, off the balance sheets. It has grown geometrically.” This second financial market has been a comfy home for subprime mortgage instruments, derivatives such as credit default swaps, hedge fund monkey business, offshore money pools, and other collusive contrivances. “The nation has two capital markets: one is semitransparent and semiregulated, the other is opaque and unregulated.” And the Securities and Exchange Commission looks the other way — deliberately.

“The investment banks sold the regulators on the theory of counterparty discipline,” says Gary Aguirre. Translated, that means “Trust us.” Trust these gamblers to be prudent when doing business — say, buying a derivatives contract — from a third party. But the collapse of Bear Stearns, and the fact that almost no firm on Wall Street detected the subprime mortgage fraud, should explode any theory of counterparty discipline. The idea was never more than “a myth sold to regulators so investment banks can operate in the shadows without regulation.”

In the Bear Stearns crisis, the Federal Reserve began loaning money to the big securities firms. In the years since the Great Depression, it had only loaned to commercial banks. So it is generally accepted that these brokerage firms will have to be regulated. Last week, Treasury Secretary Henry Paulson introduced a “regulation lite” package. Don’t expect meaningful regulation of Wall Street. For example, the Treasury only vaguely refers to possible regulatory supervision of complex derivatives, which are the villains. That would be like 1930s regulators winking at Insull and the Van Sweringen brothers, surreptitiously encouraging them to keep building their debt pyramids.

Commercial banks are supposed to be regulated. But the essence of white-collar fraud is contrived complexity. Derivatives, sated with mathematical formulae and Greek symbols, are perfect tools for that. In keeping these inscrutable derivatives off their balance sheets, the commercial banks have evaded reserve requirements, creating a shadow banking system with starkly inadequate reserves. The securities firms, too, have a shadow system; as long as they have their major weapon, complex derivatives, they can evade regulation.

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qqqqqjim April 9, 2008 @ 1:58 p.m.


Great article, as usual. You hit the nail right on the head. It's ashame that some people who are held in such high esteem, viz: Arthur Levitt, former SEC Chairman, and Alan Greenspan, did so much to help wreck this economy. Along with George Bush's 'oil war' in Iraq, this economy is in the worst shape since the 1930's. The past three months of job losses have been the first consecutive period since 1950 to experience those kinds of losses. Even Paul Volcker, former Fed Chairman, is now saying Greenspan helped create this current mess. No wonder 81% of the people think this country is on the wrong track.

-Jim Fawcett


JohnnyVegas April 9, 2008 @ 4:39 p.m.

Yes, very good article, liked it!

We need to fix things, no doubt about it.

Hopefully old Ben will do better at recognizing when and where regulation is needed, since Alan "Mr. Bubble" Greenspan failed miserably.


JohnnyVegas April 9, 2008 @ 4:42 p.m.

BTW-I take it the pic is of Mike and his brother Gary.


Don Bauder April 9, 2008 @ 8:28 p.m.

Response to post #1: You are absolutely right about the overall economy. It's a mess. The sagging economy may be around into 2010. But the scariest aspect is that the financial system is out of control. These $500 trillion to $700 trillion of unregulated derivatives, often concealed offshore, are a ticking timebomb. These were a major part of the Bear Stearns calamity, but this aspect is seldom discussed, because Wall Street and the Fed don't want the people to know about it. In the financial community, nobody trusts anybody else, and for good reason. Today (Wed.) there was more talk of writedowns by the big financial houses. The Fed and U.S. government have thrown a trillion dollars at the credit crisis. They say they are trying to prevent a recession. Ha! Recessions come and go; none is worth throwing a fraction of trillion dollars at, even in an election year. The system is sick and Wall Street and Washington know it, but aren't talking honestly. Best, Don Bauder


Don Bauder April 9, 2008 @ 8:32 p.m.

Response to post #2: Good point. Greenspan has said the derivatives are too complex to be regulated. The institutions selling them could just go offshore, etc. etc. Of course they are complex: that is the essence of white collar fraud. The US institutions that create and sell the derivatives should be told that they have to make them understandable. And if they take them offshore, they lose their ability to practice their craft in the US. And there will be stiff criminal penalties for evading the US law. This has to be brought under control. Best, Don Bauder


Don Bauder April 9, 2008 @ 8:33 p.m.

Response to post #3: Yes, Gary and Mike Aguirre. Gary is on the left. Best, Don Bauder


Anon92107 April 10, 2008 @ 3:36 a.m.

“similarities between America today and the Roman Empire in its final years” is right. The reality is that We The People are becoming one more failure in democracy because our political and intellectual leadership have failed to meet the challenges of change.

Thus the M-I-G complex that was Ike’s gravest concern now controls our democracy, and the 20th century is referred to as the Savage Century due to its record of war, threats of war and genocide, continuing into the 21st century.

Indeed, “There has been a corporate takeover of the full faith and credit of the U.S. --- The numbers are larger; the nation is in worse shape because of the war in Iraq; we don’t have the manufacturing, transportation, and infrastructure [dominance] we had then” is producing a failed national bottom line.


katzkup April 10, 2008 @ 6:37 a.m.

WELL WRITTEN DON, even though you refused to listen to me about irregularities at Brandes Investment Partners, which by the way have absolutely zero regulation either by the SEC or the NASD or any other regulatory body. The closest thing to regulation they have is Chartered Financial Analyst designations for individuals and that is it. Brandes is a prime local example of excesses that will eventually sink this economy into DEPRESSION by the end of the year about the time the worst President ever leaves office. I'm also in complete agreement that the Iraq war is a MAJOR drain on this economy. It is my opinion that the best hope for the USA is that when the DEPRESSION is here, and it may already be here, that the USA slips into anarchy with a NEW REVOLUTION BY THE PEOPLE to take back this country from a phony government that no longer is for the people by the people that is really for the fat cats by the fat cats. Only then will there be hope to regain some sanity and a future for the all of us. I will definetly get the word out about this article so others may be educated.


Don Bauder April 10, 2008 @ 7:12 a.m.

Response to post #7: The military/industrial complex isn't the only big threat today. These days, financial activities are a far larger part of economic activity than they were 50 years ago. Some say that is a sign of a declining civilization. The stock, bond and commodities floors are just big gambling casinos playing with debt. Investment banking is the same: gambling with borrowed money. Increasingly, this activity is concealed offshore. Then the Fed comes along and bails out one of the most egregious gamblers, Bear Stearns, in secret. We have very severe problems. Best, Don Bauder


Don Bauder April 10, 2008 @ 7:25 a.m.

Response to post #8: I did not use the information you gave me on Brandes because it included charges about third parties -- an internal romance that allegedly affected personnel decisions -- that I could not substantiate and that could have been defamatory. However, I wrote one column and one blog post on the problems at Brandes: deep loss positions in stocks such as Gannett, McClatchy, and Countrywide. I mentioned his new home, which is the most expensive ever built in the county. I do not believe the best hope for the U.S. is a depression. I believe there is a remote possibility of suffering one. But it could happen, and nobody is ready for anything as severe. Best, Don Bauder


MarkScha April 10, 2008 @ 9:31 a.m.

The world needs a long time out from external overstimulations, to be followed by a quiet, grassroots examination of the societies we really want. Anything less is chasing symptoms, in my estimation.


chillblaine April 10, 2008 @ 10:16 a.m.

Your article is the first and often only article I read, thank you... I am having trouble digesting the notional value of derivatives you arrive at, without citation. That is ten times world GDP, which seems improbable. Kind Regards, Matt


Anon92107 April 10, 2008 @ 12:53 p.m.

Response to post #9:

At least we have Don Bauder recording our "declining civilization" -- that's the only "good" news I can think of.

Better put your records in a time capsule for the time when 30th century or so archeologists and geologists dig down to the carbon layer of the 21st century they can find out what happened and try one more time not to make the same damned mistakes again.

I'm convinced we are too stupid and/or greedy to survive since Ike warned us and we refused to pay attention with the "best" educated people in human history. So future scientists had better be a hell of a lot more evolved or they will most certainly be just as doomed as we are.


Don Bauder April 10, 2008 @ 12:59 p.m.

Response to post #11: You are so right. Some societies are obsessed with greed, others are less so. The greed factor also varies through time. For example, the U.S. was less greed-obsessed in the 1950s and 1960s, I think. The lust for money -- and the giving of political rewards to the wealthy (e.g. tax cuts for the rich) -- began in the 1980s and has not slowed down. Avarice has picked up in Europe and Asia over that period. Now that middle and lower class incomes have been flat for eight years in the U.S. while upper 1 percent incomes and wealth have continued to soar, the nation may wake up and realize our priorities are out of whack. Best, Don Bauder


Don Bauder April 10, 2008 @ 1:09 p.m.

Response to post #12: Good question. World GDP is $50 trillion, as you say. The Bank of International Settlements, for just one, says the notional value of outstanding derivatives is $500 trillion as of March. One of the talking heads on CNBC, whose name escapes me -- he is the intelligent one -- upped the ante the other day to $500 trillion to $700 trillion. I think he sourced it but I didn't catch it. But what's the difference between $500 trillion and $700 trillion? Both are unfathomable. $500 trillion is half a quadrillion. And it's unregulated. And sometimes lost: some of these derivatives, such as credit default swaps, trade in an informal marketplace in which records are often sloppy. You don't know who is guaranteeing that the principal and interest on your bond will be paid. It's chaos. And all based on debt. The pyramids of the 1930s were nothing next to these things.Best, Don Bauder


Don Bauder April 10, 2008 @ 1:11 p.m.

Response to post #13: No matter how educated or intelligent you are, if you are obsessed with greed, you are lost. Best, Don Bauder


katzkup April 10, 2008 @ 1:18 p.m.

response to post #10 Don, I in no way want a recession or a depression. The facts are the facts. Government statistics such as the unemployment rate make no such sense whatsoever and by far come under the term accounting irregularities. This administration has been doing everything possible to make over this debt fueled economy for years now. Take for example the rebate from a couple of years ago or the one coming this summer. A bunch of baloney. Where does all the funding come from. Cutting taxes...no. Print more money...inflation and a week dollar. Auction off more treasuries....foreign countries almost now account for 50% of USA debt. The problem with society is that the people seem more concerned and know more about whats going on week to week with the garbage that is on television now a days such as reality shows. As far as socities problems are concerned the current regime just creates more laws and forces it's will on other countries. Sounds like facism or socialism or Al-Qaeda....


Don Bauder April 10, 2008 @ 6:54 p.m.

Response to post #17: Inflation is a major problem on the short run. It's coming globally -- from Asia, in particular, but also as a result of stupid monetary and fiscal policy in the U.S. The government and Fed have thrown a trillion dollars at the credit crisis. That will eventually create inflation. Commodities prices are soaring. Look out. Best, Don Bauder


Fred Williams April 11, 2008 @ 6:57 a.m.

The real estate bubble has only begun to deflate, and has a long way to go yet. And it's not only here...Spain, the U.K., and many other places (formerly our creditors) have grown 1990's Japan style bubbles of their own. They all seem to be collapsing simultaneously. Add the financial system's structural weaknesses, commodity and asset price inflation, and China's holding our debt...it's looking very bad.

Listening to people here in San Diego, most seem completely indifferent to our situation, misled by a myopic media. The phrase "fat, dumb, and happy" repeatedly comes to mind. In fact, we're more interested in watching American Idol, or cheering rapacious sports teams than in addressing our pending economic meltdown.

You make some good suggestions, but we all know they won't be implemented. The John Moores of the world rarely face justice for their financial crimes...they're tucked away safe and cozy in Rancho Santa Fe.

Even if we elect a whole new slate of reformers, there is so very little they are capable of doing now.

Don, you're lucky to be in your seventies. But your kids, like me, have to somehow deal with this mess...and historically, this kind of mess leads to bloody social collapse.

So what can we realistically do? Economically and environmentally, it looks like we're royally f*cked.


MarkScha April 11, 2008 @ 7:42 a.m.

In times like this I hope the Hindu notions of reincarnation is literally true. Many powerful, isolated people need to come back as sponges (no pun intended, though it it is tempting) because that is the only way they can absorb anything.

Reply to Fred Williams: add ethically to economically and environmentally.


Don Bauder April 11, 2008 @ 8:07 a.m.

Response to post #19: Good choice of words: ROYALLY f**ked. The San Diego overlords are indeed screwing the serfs. Example: Read a pathetic commentary titled "Time for all to get behind stadium effort" on the editorial page of today's U-T. First, it's written by the chairman of the San Diego Regional Economic Development Corp. In 35 years of covering the San Diego economy, I have never figured out what this organization does, other than pay outlandish salaries to its CEO. The piece is shot through with absurdities. For example, Qualcomm Stadium is considered "non-competitive." But the Chargers have been one of the best teams in football in the last several years. It talks about the importance of bringing Super Bowls. One of the biggest scams going these days is the NFL's claim that a city gets $330 million out of hosting a Super Bowl. It isn't even one-tenth of that, according to economists. In fact, a city may lose when hosting this event. The commentary talks about a "privately-financed" stadium. That would be great, but it's just verbiage. In their proposals, the Chargers have always wanted a significant governmental handout. The commentary mentions that business groups such as the Chamber of Commerce want a new stadium for the Chargers, at a time when the City of San Diego is sinking financially, and so is Chula Vista. My guess is that the serfs will fall for this propaganda. Best, Don Bauder


Don Bauder April 11, 2008 @ 8:09 a.m.

Response to post #20: The word "sponges" describes San Diego's downtown business cabal, particularly real estate developers. Best, Don Bauder


JohnnyVegas April 11, 2008 @ 8:30 a.m.

Good choice of words: ROYALLY f**ked. The San Diego overlords are indeed screwing the serfs. Example: Read a pathetic commentary titled "Time for all to get behind stadium effort" on the editorial page of today's U-T. First, it's written by the chairman of the San Diego Regional Economic Development Corp.

Ahhh Don, you beat me to it!

I almost rolled off my chair when I read that garbage this morning, not kowing whether to die of laughter or heartache because so many will beleive that garbage.

Saying the Chargers are "not competetive" (baloney-open the books then), and that the Chargers are a "regional asset" like the Zoo and beaches.....and how the Spanos's have shelled out a whopping $10 million (according to Spanos anyway-but 100% unverified-and I am sure inflated about 1,000%...)........Bwahahahahha......!

Guys like him wae the reason we are in this mess to begin with.


Don Bauder April 11, 2008 @ 10:49 a.m.

Response to post #23: Yes, the claim that the Chargers have spent $10 million trying to wangle a stadium is a hoot: the team's original plan for Mission Valley could have been thrown together in a couple of days, and probably was. The same could possibly said for the Oceanside and Chula Vista proposals. Best, Don Bauder


FJL April 11, 2008 @ 3 p.m.

Great article but I take one exception... as a Postal Service employee in the old Civil Service retirement system, you would likely include me in the 'Gov't pensions at all levels' comment. If I go out at 55 yrs with 31 yrs of service, my retirement will equal approximately 63% of my best 3 yrs average. Work until 66 and I may max out at about 80%. Slightly reduced health benefits if we stay with the plan we had ( retirees say out of pocket per month over $200 and growing). Excessive... I think not.


Justice4all April 11, 2008 @ 3:30 p.m.

FJL that sounds much more reasonable than the city pensions. (Especially if most postal salaries are reasonable)


probalistic April 11, 2008 @ 5:17 p.m.

Mr. Bauder,

Great article. I was wondering if you discussed Milberg Weiss and Bill Lerach with Gary Aguirre. (Lerach left Milberg Weiss in 2004 to form antoher firm based in San Diego).

One question that keeps coming up when I read about the indictments of Milberg partners and former partners, is how did these lawyers know in which companies to have their "client" purchase substantial shares in just prior to the announcement of an SEC investigation? Was someone in the SEC tipping them off, or were kickbacks in addition to those of their "client" also being paid to an SEC official for pursuing investigations into firms targeted by Milberg and Lerach?

Would love to hear Gary Aguire's thoughts on the subject.


Don Bauder April 11, 2008 @ 6:04 p.m.

Response to post #25: Yours is a reasonable pension arrangement. Compare it with the retirements of San Diego employees, who walk off with more than 100 percent of their top pay. Best, Don Bauder


Don Bauder April 11, 2008 @ 6:06 p.m.

Response to post #26: City of San Diego pension arrangements are particularly unreasonable, because the City can't afford to pay them. Best, Don Bauder


Don Bauder April 11, 2008 @ 6:11 p.m.

Response to post #27: Both Gary and Mike Aguirre believe that Lerach's old firm engaged in untoward tactics, above and beyond the offenses for which some principals, including Lerach, will be spending time in prison. I have never heard that somebody inside the SEC was tipping off that firm. I would doubt it seriously. It is my understanding that Milberg Weiss's San Diego office had people combing the newspapers for some kind of trouble at a company. Then it rushed to get to the court first so it could be lead law firm. Bribing people to be plaintiffs is what got them in trouble. Best, Don Bauder


JohnnyVegas April 11, 2008 @ 11:09 p.m.

Milberg had a client (a lawyer) out in Palm Springs who had bought small shares in literally thousands of companies, and he was their main "clinet". So all Milberg did was sit back and looked for was a substantial drop in shares of a major company, then they took their "client" to federal court where under the old rules the first to file was lead plaintiff on the case.

So Milberg had a stable in place for filing class actions.

I just read today that Marti Emerald, who quit her job at KGTV to run for City Council, has two consulting clients, of which the main one is Coughlin Stoia, the break off firm of Milberg Wiess (here in San Diego). I thought that was sort of weird, especially when Marti claimed they were a "consumer law firm"....lol.

Melvyn Weiss pleaded guilty last month, and I think only the firm itself is left as a defendant is to settle at this point....


Don Bauder April 12, 2008 @ 7:51 a.m.

Response to post #31: Yes, it was a kickback scheme with the person who was plaintiff, who rushed to file a suit as soon as a stock plunged or a company announced bad news. At that time (the law has since changed), the law firm getting to the court first would be lead firm. I do believe Coughlin Stoia, set up by Lerach when he split off from Milberg Weiss, does do a lot of consumer work. Securities work is not as profitable these days. Best, Don Bauder


jpy April 12, 2008 @ 8:07 p.m.


I have read yur articles since way back in the UT days. I, like most others, find what you have to say always relevant, timely, and important to throw out a few adjectives (I think that's the word for such descriptions). You impart a trustable and believable (because of the element of truth) aspect to many stories that can be found in no other place that I know of.

I wonder if the local rag would be in such bad shape if you and your readers were still on board at that place. Certainly, the SDReader is a forum indispensible to our area. Too bad so many people think of it as a counterculture forum.

If your articles had more exposure, like nationally, I would bet a lot more citizens would be a little more concerned about the direction our democracy is heading. I sometimes wonder: do you get many death threats or find dead fish wrapped in paper on your front porch? Glad you have the cajones to go along with the rest (see above) to keep some of us informed.

This is the first, and only so far, blog I have ever issued to and that's because of you. Please remain healthy for years to come...I don't think if anybody else could fill your shoes, unless you have an apprentice behind you now. Best to you too, JPY.


Don Bauder April 12, 2008 @ 10:30 p.m.

Response to post #33: Yes, I have received death threats. I received several in my 30 years at the U-T, but none so far in my five years with the Reader. Some people may think of the Reader as a counterculture medium, but by whatever name, it prints things that nobody else in town dares print. I have written many, many things that I wouldn't have dreamt of even submitting at the Union-Tribune. Best, Don Bauder


JohnnyVegas April 22, 2008 @ 9:27 p.m.

Voice of San Diego just put out a really good article that is along the same lines of this one.... Both are excellent and on the money.



Don Bauder April 23, 2008 @ 6:51 a.m.

Response to post #35: I'll take a look at the Voice article. Best, Don Bauder


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