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Is it Going to be a Civic or Corrupt Society?

"A corrupcao nao e uma invencao Brasilera, mas a impunidade e uma coisa muito novo."  [Corruption is not a Brazilian invention, but the impunity is a very new thing.] -- Jo Soares, the notoriously corrupt former President of Brazil
“We can have only one justice system in this country for both the rich and powerful and those who are not. I’m not prejudging the merits of this action, but if we don’t treat Wall Street firms that have allegedly defrauded investors of millions of dollars with the same gravity as we treat all others, why would our citizens have faith in the rule of law?" -- Sen. Ted Kaufmann
While the long overdue fraud charges against Goldman Sachs is the lead story of the day, here is another report that illustrates how throughly corrupt and lazy US regulators such as the SEC have been over the last decade. The SEC inspector general now says examiners concluded four times from 1997 to 2004 that Texas Ponzi financier Allen Stanford was running a fraudulent business but decided to go no further. The crony, Spencer Barasch, who was running the enforcement office in Fort Worth, repeatedly quashed Sanford probes while at the same time representing him in private practice.

This kind of story and its ilk illustrates just how close the US is coming to a complete breakdown of civic society similar to countries like Russia, Brazil or Greece. Once that happens, strategies like tax evasion (leading to Greek style bankruptcy),  bribes, corruption and civil disobedience becomes the norm even for the most decent, public-good oriented citizens. Decent folks become laughing stocks. Reversing the breakdown of civic society becomes overwhelming, especially for "leadership" that enables corrupt and irresponsible behavior 24/7. Democracy also breaks down. Ultimately, an authoritarian response will be the only way to put the genie back in the bottle. Mark my words.
  • The core of the problem is that we don't have a culture of civic society," says Stavros Katsios, a professor at Greece's Ionian University who specializes in economic crime. "In Greece, complying with the rules is a matter of dishonor. They call you stupid if you follow the rules."


Perhaps in a last-gasp effort to prevent the final slide into such an outcome, one of the tainted aforementioned corrupt agencies (the SEC) has at last brought actions against the vampire squid, Goldman Sachs. Others are speculating (I think correctly) that this is also leverage to try and get some muscle into the financial reform issue. Friday, a strong bill was introduced by chairwoman Blanche Lincoln, Senate Agriculture Committee. It would force the big Pig Men to spin off their derivative businesses. Even Obama has now promised to veto legislation that "does not bring the derivative market under control." Senator from AIG Christopher Dodd also sounds tough when saying, "We don't need to know the outcome of this case to know that the opaque nature of unregulated ABS fueled the financial crisis." Even Bill Clinton joins in and distances himself from advisors Rubin and Summers on the regulation of derivatives. The Republicans are digging in on bailouts, but Simon Johnson suggest there are only three GOP senators who have a real clue.  There is an effort pushed by Sherrod Brown of Ohio-D on TBTF legislation. Our man Simon Johnson says to watch this measure as the key to see if true reform is coming. Politics as usual is getting out of hand, which in turn plays into the hands of the corrupt.


In terms of actionables, this is exactly the kind of moment when the Pig Men may very well pull off a "you need us," dynamite-strapped market rout to beat the natives back into submission. This, along with buying off the Government, are the principal tools that they have. But just like the Mafia, even bought-off authorities have their limits once the mob's "doing God's work"  behavior gets too arrogant. Right now, few in the political arena want to be associated with the banksters. Accordingly, the most likely tool the banksters will utilize is another good old fashion market scare. Conditions are ripe given the incredible complacency that has developed in the securities markets. And if the Government moves to extract some hide from the banksters this will effect the now-ingrained belief system in blank-check, bailout, TBTF economics and will rock the markets.

I think what is different this time is that more eyes are glued to Pig Men behaviors, while as in 2006 and 2007 it was just the tin foil hat types like me watching. Right now, eyes are focused on the opaque land mines that went off in the mortgage backed securities and CDOs markets. Meanwhile, this tin foil hatter is wondering out loud what new tripwires are rigged around interest rate derivatives. What counter parties will blow up the moment rates start spiking and a Government funding crisis emerges? Stay tuned.

Disclosure: no positions

Disclosure: no positions