On security matters, one sizes does not fit all

We Americans have always found comfort by wrapping ourselves in a one-size-fits-all security blanket.

We safeguarded our domestic security by redoubling our efforts to catch and punish crooks and murderers who endanger our homes and streets. We safeguarded our national security by taking hard lines against those who willfully endanger our country — spies selling stolen secrets got tough sentences and sometimes paid with their life. We called them "traitors" — because their greed put our nation at grave risk.

Yet today we are a nation that feels blindsided. Our security has been shaken on all fronts. Domestic security: The jobs, homes, families and health insurance of millions are gone and many millions more are at risk. National security: Our ability to safeguard our homeland and remain the world’s predominant leader has been shaken in ways unimaginable just months ago. The other day, China, our debtor, questioned whether Uncle Sam is on the skids and may soon be a deadbeat.

All because of greedy financial operators whose actions may have already caused our nation more hurtful, long-term consequences than did any number of spies and traitors whom we harshly punish.

These gamblers amassed fortunes at our expense by operating within the shamefully loose legal limits of the one security category America has never policed with its famous toughness: Economic security.

An entire system of housing finance was allowed to become just a house of cards. Financial empires gorged themselves on profits that were backed by nothing at all — and none of that mattered as long as markets and prices kept rising. Mortgages were sold around the world, sometimes split up and sold piecemeal. Those within the financial fraternity paid themselves millions in outlandishly large salaries and piled on bonuses that were far grander. These high rollers were not backroom gamblers. They were boardroom barons, the financial world’s Who’s Who.

America policed these high-rollers of Big Banking and Big Speculating (see also: Big Gambling) with a wink-and-a-nod. And yes, those firms larded our leaders with big campaign contributions and other fringes — but that really doesn’t explain what went so unconscionably wrong inside the financial world.

One big problem was that the government permitted unregulated derivative dealings known as credit default swaps. American International Group (AIG) was a leading player in this. It was a so-called insurance in which mortgages could be swapped, with the seller guaranteeing to pay those who invested, if the investment collapsed. But the seller (AIG) wasn’t required to hold reserves to fulfill its commitment to pay in case the investment failed. That flaw became the foundation of housing’s house of cards.

This was never about insurance — it was gambling. Mind-numbingly legal gambling. In 2000, Congress exempted credit default swaps from being regulated by state gaming laws, a key point noted in the middle of a March 15 New York Times editorial. The piece noted that New York State Insurance Superintendent Eric Dinallo said some 80 percent of the $62 trillion in outstanding credit swaps in 2008 were speculative.

Now we are told we must bail out AIG — and that AIG has no choice but to pay $165 million in bonuses to those who work in the AIG Financial Products division that caused this crisis. We are told they must get their bonuses or else they will leave, and only they can unravel the mess they made. And if the AIG bonus babies flee we face an even bigger economic meltdown. AIG’s shameless traders say this is our choice: Meltdown or shakedown.

Let’s never forget: The Congress had a chance to clamp down on AIG’s high-rolling gamblers — the ones who begat the economic security crisis that begat our national security crises. But Congress whiffed. And the news media watchdogs (both paper-trained and electronic) meekly sniffed, and moved on to the next sex scandal. Some nose for news.

We should have barked loudly enough, on page one and in prime time, to get the attention of the politicians. Or, if that cause proved hopeless, awaken the people who elect them.

(Martin Schram writes political analysis for Scripps Howard News Service. E-mail him at martin.schram(at)gmail.com.)