I have an MBA friend, Mike, who is also a CFA-Chartered Financial Analyst whose Financial Counseling business must legally adhere to Fiduciary Trust obligations which does not allow the conflict of interest and high financial risk taking that was so prominent in the recent financial debacle. CFA-based Financial Counselors did not succumb to in-house blandishments like at many of the much bigger financial institutions. I know this for a fact because the discussions I had with Mike on financial markets during 2007 to 2009 were a lot more frank than financial advice I was getting from 3 major bank brokerage firms. I always got the feeling that with the banks I was the target of the bank’s next investment house push. Not strictly wrong, but neither well tuned to my own investment profile and requirements.
Curiously during the drubbing that the Financial Advisory Community has taken over the past 2 years, my friend has remained strangely loyal to the TBTF-Too Big To Fail banks and other financial banksters – a remarkably small group of officers at the large banks, insurance companies, investment houses and hedge funds. Yes, Mike is sympathetic towards greater control of conflict of interest in big bank brokerages – i.e. the brokerage and other “financial advisors” should be subject to the same “no conflict of interest” and other fiduciary trust legal obligations as CFA-based Financial Counselors .
But on the broader questions of the health Financial Markets, Mike is amazingly sympathetic to this nefarious group of Banksters that not only have made life financially miserable for all of us; but have have also , in a case of singularly callous case of friendly fire collateral damage, utterly besmirched if not ruined the reputations tens of thousands of financially prudent and responsible financial institutions and counseling companies like Mike’s. There are are three areas where Mike, like Conservative pundit George Will and Mad Money’s Jim Cramer, strangely adhere to the Bankster’s line.
1)The housing crisis occurred because of government institutions and regulators – Fannie Mae and Freddie Mac and other government institutions were pushing for housing loans to minority groups so the Financial Community, recognizing the risk, developed CDS and other derivative instruments to protect themselves and the markets from the risks posed by these new housing investors. Nothing else. Here is one side of that story which is already weak.– But on the the other side is the extravagant schemes that Country-wide and other housing lenders used to rope in borrowers to get lucrative variable rate mortgages and the generally bad advice that Bankster’s agents gave to their housing clients borrowing strategy in defiance of elementary fiduciary trust obligations.
2)The myth that Financial Markets are open, transparent and provably efficient if you just let them be – the counter evidence on the Too Big To Fail segments with their huge over-leverage coupled with the enormous [tens of trillions of dollars teetering over and dwarfing the huge World credit markets], complex, and shadow derivative markets are distinct counter arguments. These many shadow , non-open and non-transparent markets are just assumed to be competitive and efficient because Greenspan and the Chicago School of Economists said they are?? And these markets were supposedly working just fine – if institutions fail, let the markets run and clear the debris. It is distressing to see such disregard for what happened in mid September 2008 – the World’s Financial Markets had ceased up and were not working when Lehman Brothers was allowed to fail. Markets that were not open, transparent and efficient with nobody knowing who would fail next proved the case of non-function markets – both derivative and the broader credit markets had simply stopped working.
3)The failure of regulators to effectively police the markets is a primary cause of the downfall. Lets not mince words here – regulators did contribute to the fall. But lets not fail to see the cause – government regulators are at a severe disadvantage relative to the financial firms in terms of the numbers of persons, their relative salaries, and the constant lobbying influence that financial firms are able to bring to bear on any and all regulatory matters. And the Supreme Court, in its “infinite wisdom”, has seen fit in recent days to increase that advantage 10 to 100 fold by allowing unlimited campaign financing to corporations and special interest groups[scenario: lobbyist to Congressman advocating financial reforms – ‘if this measure passes my clients will do everything they can to assure you don’t get re-elected. Given the slow pace of current reforms – this is not far fetched]. It took the banks 60-80 years to disarm Glass Steagall and other regulations that limited financial conflict of interest and excessive risk taking among banks and other financial institutions. So far the consensus among financial pundits is that a)no meaningful financial reform has been enacted and b)even if it were it could be dismantled in less than 5 years.
The latter point makes simple, effective regulation vital. It must be so clear cut and simple [for example realistic bank capital leverage ratios] that there can be no dispute when banks and other financial institutions have crossed the line. And the line should involve privileged “Too Big To Fail” banks paying into a goverment fund the hundreds of billions necessary to bail out companies that take too big risks. Let me assure you, if so committed to such a rescue fund, the TBTF banks would watch each other like hawks and not allow any of their associates to crank up the risk ratios and endanger their billions of insurance money. In short, it would provide a measure of self-policing that the banksters simply have not done for themselves and their customers. Instead they have forced governments to step in and rescue them [Citigroup to Goldman Sachs were all goners without TARP and other bailout funds].
But the broader issue is why do so many financial players, influencers, and commentators tow the financial party line and remain so loyal to myths and practices about financial markets when a)those markets are clearly not working and b)they surely will endanger world economies once again – and maybe with even more dire consequences. Only the Shadow knows …