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Walking Conflicts of Interest

Robert Kuttner, Co-Founder and Co-Editor of The American Prospect, has a great Op Ed on the Huffington Post (here).  The title of the piece is "Listening to Paul Volcker".

Kuttner maintains that Volcker is now the most left wing person in the room when Washington discussions of financial system reform are undertaken.  Kuttner maintains that Volcker's ideas are basically ignored.  These include clearing the deck of too big to fail concerns, reemploying basic regulation and separation of interests reforms (Glass-Steagall like), and ensuring that more plain vanilla finance investment options exist.

Kuttner writes: 

"As Congress deliberates the details of financial reform, several of the key elements of the Obama program fall short -- the idea that "systemic risk regulation" should just be bucked to the Federal Reserve; that immense financial conglomerates are perfectly fine as long as the Fed is keeping an eye on them -- the same Fed that totally missed the sub-prime disaster and that is owned by its member banks; the acceptance of the premise that customized derivative securities need not be traded on exchanges; the continuing toleration of the business models of behemoth financial conglomerates such as Goldman Sachs, which mix investment banking, hedge-fund speculation, proprietary trading for their own accounts, and commercial banking -- making them walking conflicts of interest."

Let me start listing the "walking conflicts of interest", some of which are specified by Kuttner:

1.  The proposal is ludicrous that the Fed, which is owned by the banks, is the proper regulator for the banks.  This is the old fox watching the hen house scenario.

2.  Banks responsible for customer deposits are operating like hedge funds.  They can use FDIC (read that as U.S. government) insured deposits to go to the casino.

3.  The continued opposition of banks to the concept of requiring independent exchanges for public trading of their debt instruments and derivatives is simply the protection of a conflict of interest.  They want the ability to mark to fantasy rather than to have to face real market forces.

4.  The legislation affecting the financial sector is written by their employees (lobbyists) and voted on by their paid lackeys (congressmen and senators).

5.  The maintenance by banks, and supported by congressmen, that consumer protection with regard to financial products is not needed is protecting the banks' conflict of interest.

6.  Continuing to allow the invention of financial engineering innovations that often serve no positive purpose other than increasing the income of the inventor is perpetuating a conflict of interest.  The entity that stands to profit is the only arbiter of utility.  Their customer (retailer) is perfectly willing to accept the inventor's word in order to collect their commission in passing the garbage along to the final pension fund, endowment or retail sucker. 

7.  The continued opposition of FINRA to imposition of fiduciary responsibility on stock brokers who offer financial advice.  FINRA is the Financial Industry Regulatory Authority, a broker-dealer self-regulatory organization (  The function of FINRA is to protect the interests of the stock broker and its broker-dealer members.

I am sure this list is incomplete, but I'll stop here.  I think that Kuttner's conclusion is better than anything else I could add:

"If the American financial system needs anything, it needs a lot more plain vanilla -- fewer products of Byzantine complexity that serve no economic need other than the profit of their sponsors, less excessive risk, and more service by financial institutions to the real Main Street economy. We should be paying a lot more attention to plain vanilla type guys like Paul Volcker."

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