The Simple Reality On Bank "Regulation"
The Market Ticker ® - Commentary on The Capital Markets
Posted 2012-12-06 09:20
by Karl Denninger
in Bank Reform
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The Simple Reality On Bank "Regulation"
 

From the FT and Bloomberg:

Three former Deutsche Bank AG (DBK)employees told U.S. regulators that the German lender covered up paper losses during the financial crisis, the Financial Times reported. The company disputed the allegation.

The employees -- a trader and two risk managers -- told the Securities and Exchange Commission that the Frankfurt-based bank inflated the value of credit derivatives to avoid recognizing as much as $12 billion in losses, the newspaper reported, citing people it didn’t identify. The portfolio had a notional value of $130 billion, the FT said.

Let's drill into this at the most-fundamental level -- the reason we have reports like this that surface is that we do not require that all of these instruments trade on an exchange, and thus we continue to have people make claims of asset valuations that are not supported by an actual trade at an actual price.

This sort of intentional distortion became effective law in the United States in 2009 following the Kanjorski hearing when FASB was effectively extorted by Congress. 

That was the proximate event that halted the stock market slide in early 2009.

This sort of game, incidentally, has precedent.  During the Latin-American Debt Crisis Volcker is known to have intentionally allowed banks to lie about their asset valuations and exposure on Latin American debt.  Several large banks were factually insolvent and under the law should have been immediately closed.

There are many who argue that we "orderly markets" require that we allow these games to be played from time to time as these are "temporary insolvencies" and "cure themselves" if we allow large firms to "earn their way out of the hole."

The truth is more sinister -- firms get into the hole in the first place because they believe they will be permitted to play this game and instead of being held to account they will be given a pass.

That in turn leads to both outrageous subsidy costs being passed to the taxpayer and general citizen (e.g. ridiculous overdraft fees and other games) through the back door instead of good corporate governance and risk controls being imposed by boards up front

This is exactly like a gambler in Vegas who has no fear of losing because when he loses he can force someone else to cover his marker, but when he wins he gets to keep the money.

When financial institutions gain the ability to use the guns possessed by government to force others to cover their expenses and commit frauds that you or I would go to prison for, arguing that "the economy requires that we prevent the bad outcomes from happening", we continually slip further and further toward losing our nation.

This game must stop, not because of an alleged $12 billion concealment but because no institution should be able to counterfeit the currency of any nation in which it operates, and any financial institution that issues unbacked credit whether above-board or under the table is doing exactly that.

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User Info The Simple Reality On Bank "Regulation" in forum [Market-Ticker]
Obseedian
Posts: 11872
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This is why I think bank regulation by government (or the Fed) is a very BAD idea. Possible solutions would be:

1. Repeal deposit insurance
2. Make bank directors personally liable for any lost deposits if fraud is proven in court.

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Would you give your money to these banks? http://bankimplode.com/list/troubledbank....

“Those who vote decide nothing. Those who count the vote decide everything.” - Joseph Stalin
Fraudster
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Let it crash and burn.

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"Let China sleep, for when she wakes, she will shake the world." - Napoleon Bonaparte

"Circulation ceases first at the outer edges [Europe and Japan]. It will take a while yet for the decay to reach the heart [America]." - Foundation & Empire by Isaac Asimov
Northeaster
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Massachusetts
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"any financial institution that issues unbacked credit" -

Would this be the same of derivatives?

http://www.occ.gov/topics/capital-market....

I couldn't begin to comprehend the "ins & outs" of this market, but being hundreds of times over-leveraged doesn't seem very prudent (or legal in a Rule of Law world). Were just some of these to go bad, it would wipe out the entire bank. Of course I think we know CONgress will never allow that to happen.

I think Janet Tavakoli is an expert in this area and I wish she would write about it more often.

Fraud everywhere no?
Tman2
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"This sort of intentional distortion became effective law in the United States in 2009 following the Kanjorski hearing when FASB was effectively extorted by Congress."

I remember this well...at the time I couldn't believe that they could change the law like this overnight. A real wake-up call to me.

The crooks are in charge. BEWARE!!!
Peterm99
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Obseedian wrote..
Make bank directors personally liable for any lost deposits if fraud is proven in court.
In other words, never.

That is the problem. Only in the rarest of circumstances are they taken to court to face criminal charges, and, given the influence that they have, it is highly unlikely that that will ever change.

I agree that the repeal of deposit insurance would help to awaken the public at large to some of the issues of the banking system, however, I believe that a better solution is to keep the insurance for relatively small amounts (as it is now) but to put real teeth into PCA requirements. We can see how an FDIC chair who wouldn't know the meaning of PCA if it hit her in the face is in the process of becoming of becoming a rich media celebrity in spite of failing to have performed her job for years. Just like the laws governing the Fed need an "or else", so do those governing the performance of financial regulators.

Personally, I'd like to see "drawn and quartered" appear in the "or else" clauses.

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". . . the Constitution has died, the economy welters in irreversible decline, we have perpetual war, all power lies in the hands of the executive, the police are supreme, and a surveillance beyond Orwell’s imaginings falls into place." - Fred Reed
Lugnut
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Karl, you neglected to mention the punchline to this joke.

"Robert Khuzami, head of enforcement at the SEC, has recused himself from all Deutsche Bank investigations because he was Deutsche’s general counsel for the Americas from 2004 to 2009. Dick Walker, Deutsche’s general counsel, is a former head of enforcement at the SEC. The SEC declined to comment on the investigation."

Think the enforcement fox is going to preside over the execution of the guarding fox for all of the chickens killed in the henhouse? Not likely.

Obseedian
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Quote:
Only in the rarest of circumstances are they taken to court to face criminal charges

I'm talking about civil action brought by depositors themselves.

Deposit "insurance" is no insurance at all. You can only insure against random acts of nature, not willful acts by man. As such, it is open to all kinds of abuse by bankers who end up collecting all the gains of the frauds and get to put the losses on everybody else (I intentionally didn't use the words "government" or "taxpayer" since the losses would be paid for via inflation) without having to take a personal loss. That has to end.

Of course for these reforms to happen, government would have to pass it which will never happen.

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Would you give your money to these banks? http://bankimplode.com/list/troubledbank....

“Those who vote decide nothing. Those who count the vote decide everything.” - Joseph Stalin
Mrbill
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Maxine. Waters.
Donethat
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12 Billion in losses on 130 Billion in notional????

But there are about 30 Trillion in notional derivatives ... ( not double counting both sides, like the Nasdaq volume numbers ).
Curbyourrisk
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Farmingdale, NY
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FAILURE - IS THE BEST REGULATION

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Time is up.

I hate to burst your bubble, but there is no Santa Claus, the tooth fairy does not exist and American justice does not involve the courts.
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