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Sy Harding founded Asset Management Research Corporation in 1988 for the purpose of providing stock market and economic research to institutions and serious investors. Harding’s engineering background, coupled with his experience in operating high-tech businesses through numerous economic... More
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  • The ‘Banking Industry/Regulators' Time-Bomb! 1 comment
    Jul 13, 2012 4:24 PM

    When President Eisenhower left office in 1961 his parting message to the nation was to "beware the Industrial/Military complex". He warned that military contractors had become so chummy with Congress and the Pentagon that "the potential for a disastrous rise of misplaced power exists."

    We now face a much more dangerous power grab that could actually melt down the entire financial system of the country if it isn't brought under control.

    I refer of course to the still growing power and influence of the financial industry.

    We've already seen frightening examples of how out of control it has become, how undeterred it is in its quest for huge profits for a chosen few insiders, with total lack of concern about the effect on the rest of country.

    The U.S. is still reeling from the manipulative build-up of the housing bubble, the sub-prime mortgage mess, the resulting real estate crash, and the financial crisis of 2008 that required a multi-trillion dollar bailout of banks and brokerage firms.

    And the threats continue unabated.

    We were promised new regulations that would prevent the abuses of the past, downsizing of the financial firms that had become too big to fail and had to be bailed out, punishment of the wrongdoers, and so on.

    You know what a joke those promises have become.

    For four years the financial industry has successfully lobbied to water down and delay the new regulations. The previously too big to fail financial firms have become even larger and more ominous through mergers suggested and abetted by the regulators as part of the rescue effort from the 2008 crisis. No one has gone to jail, most of the same 'masters of the universe' that ran the firms before are still running them (and still drawing down unconscionable salaries and bonuses).

    I was shocked to read the other day that the 5-year statute of limitations for the SEC to bring charges related to the 2008 meltdown will soon run out, and SEC officials are 'concerned' that they won't make the deadline on some cases on which they supposedly want to file suits.

    The costs of the 2008-2009 bailout that prevented the country from plunging into another Great Depression, are still hanging over the rest of us in the form of a weak economy, record government debt, record budget deficits, and the so-called 'fiscal cliff' to be faced in 2013.

    So is the financial industry ashamed of its former activities and pitching in to help? No sign of that.

    The latest scandal is the manipulation of the Libor (London Interbank Offered Rate). And it's a beauty. The Libor influences hundreds of $trillions in financial contracts around the world, including mortgages, corporate loans, loans to individuals, and interest-rate swaps. The 16 major banks that set the rate are under investigation by authorities in the U.S., Canada, Europe, and Asia, suspected of manipulating the rate.

    As Bloomberg News puts it, "The investigators are piecing together a breath-taking portrait of avarice and deceit, with the potential to become the most costly manipulation in the history of banking." Forbes says. "The Libor rate scandal could make banks' mortgage and foreclosure troubles look like child's play."

    Already giant Barclays Bank has agreed to pay $453 million to settle U.S. and British allegations, and its three top executives have resigned.

    Bad enough. But once again it must be asked - where were the regulators?

    It's being reported that as far back as 2007 the U.S. Federal Reserve was concerned about the arbitrary way by which Libor was being set, and urged U.K. officials to reform the process to prevent the possibility of manipulation.

    Nothing was done.

    This week we've had the shutdown of futures trading firm Peregrine Financial Group Inc., and the alleged disappearance of $215 million in customer funds. Where were the regulators on that one? The firm was involved in dozens of arbitration disputes with disgruntled customers in recent years, but that didn't alarm regulators (who now say the firm was cooking the books for at least two years, and issuing fraudulent statements to customers).

    Interestingly, last fall futures trading firm MF Global imploded, and an estimated $1.2 billion of customers' funds disappeared. Regulators then ordered a review of all futures firms to ensure the safety of customer money. And even with that review, Peregrine Financial Group was given a clean bill of health in January.

    To be sure, these latter two situations are collapses brought on by the shameful activities of individual firms and not the result of industry-wide practices.

    But that is not the point. The point is where are the regulators in all these situations?

    It doesn't seem to matter if it's industry-wide practices like those revealed in the investigations after the 2008 financial collapse, or activities by a small group of major banks as is alleged in the current Libor scandal, or the fraudulent activities of individual firms that result in losses only for their own customers. Where are the regulators?

    Washington continues to have the resolution of the still out-of-control financial industry and its regulators pushed into the background, while they argue over immigration laws, same-sex marriages, and how to handle healthcare.

    Meanwhile, the clock is ticking on very serious economic and financial time-bombs, the potential damage from which dwarfs all other concerns.

    Someone had better wake up and get with it.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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  • jhooper
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    Quite the doom and gloom article.


    If regulators could really stop bad things from happening, they would have already done it, and nothing bad would ever happen. For a regulator to be a regulator, they have to know more about the markets than the people actually in the markets. If regulators had such knowledge, they wouldn't be regulators, they would be in the markets. But they aren't. Are they?


    For instance if the people at the FDIC know how a bank should be run, then why aren't they bankers? If they know how to make a bank that satisfies shareholders, satisfies customers, and meets the community needs, and bankers would refuse to do this without the regulators, then the regulators could just go start the bank that everyone wanted but yet that no one would provide, and garner themselves a 100% market share. Such a bank would make these regulators turned bankers the richest people in the country, but yet they keep their regulator job and their gov salary.


    The reason that banks and financial markets keep creating bubbles that cost everyone dearly, is not because the gov regulators don't have enough power, but because the gov regulators have the power they do. Gov regulators use coercion as the basis of their decisions, thus they are blind to their mistakes. Giving them more power is like giving a box of live hand grenades to preschoolers, and when they blow up half the class, you give them even more hand grenades.


    Markets haven't been deregulated or under regulated, they have been gov regulated, which means the regulations are price blind. In markets that only work when the players are price sensitive, having price blind regulators that use coercion (price blindness) rather than voluntary cooperation (price sensitivity) is a prescription for bubbles followed by busts and then austerity.


    Just as we are seeing right now.


    I can't wait for someone to suggest that regulators are just like police officers.
    15 Jul 2012, 08:00 PM Reply Like
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