Financial Regulation: War of Attrition

During the Financial crisis, a consistent complaint has been that the Federal Financial regulators have proved to be no match for Wall Street Manipulators. The two primary cases cited are the Madoff scandal missed by the SEC despite 3-4 clear advisories from whistle blowers  and the Mortgage Meltdown ignored by many of the 17 Federal agencies that regulate business and finance, most under the control of the Treasury secretary. Nowhere is the skepticism on the defectiveness of the Financial Regulation been more scathing than in the Dow jones websites. For example here is  this skeptical take at Maketwatch on indictments for Oil Scamming:

It took a couple of years, but U.S. regulators finally have collected enough information to slap a civil lawsuit against a tight-knit group of oil traders for allegedly “unlawfully manipulating and attempting to manipulate” crude futures on the New York Mercantile Exchange.The case, brought Tuesday by the Commodity Futures Trading Commission, seeks to expose a dirty little practice that legitimate energy traders and hard-pressed consumers long have suspected of contributing to a sharp spike in oil prices in 2008 — the first time crude futures topped $100 a barrel.

The commission described a scheme that claims affiliates Parnon Energy Inc., Arcadia Petroleum Ltd. and Arcadia Energy (Suisse) SA, assisted by energy traders James Dyer of Australia and Nicholas Wildgoose of California, bought physical oil (what traders call “wet barrels”) they did not need. Of course they didn’t; they don’t operate any refineries. Read more about the CFTC’s complaint on the alleged scheme.The seriousness of the case can’t be overstated. If true, these guys were playing with the lifeblood of commerce and industry, perhaps sapping billions of dollars from the global economy.

The CFTC lays out a compelling, detailed case. Of course, people will ask what took them so long….But one thing is clear: The case against these parties had better be watertight. Because if it isn’t, CFTC officials will look like complete fools.It’s also critically important to get it right if this is merely the first in a series of cases, much like the legal campaign now being waged by the Securities Exchange Commission against insider trading on Wall Street. For years, critics have accused federal regulators of being asleep at the wheel. While the CFTC aims to send a strong message to anyone thinking about gaming oil prices, it also clearly aims to quash public suspicion of regulatory neglect.

Even more interesting is the comments to the report:

“Nobody will get punished. No one will admit any wrong doing. That’s how it works right?”
Or
“Well nobody at Goldman Sachs went to jail, even after admitting cheating clients. Also nobody seems to have gone to jail for breach of fiduciary responsibility and other crimes in the banking meltdown. In fact rewarding failure has been a hallmark of the DC boys for about 12 years now. In the aftermath of the previous S&L meltdown (Keating 5… remember) there were thousands of ‘bankers’ who went to jail. Now instead of punishment, banksters get rewarded! What could possibly go wrong?”

The degree of skepticism is emphasized by  this scathing take  at Marketwatch by David Weidner How to make Money using Hedge Funds is replete with bitter irony:

Are you tired of watching hedge funds ruthlessly beat the returns of your amateurish portfolio? Do you ever wonder how guys like John Paulson and Steve Cohen so easily produce 15%, 20%, even 30% returns on an annual basis?…Well, don’t walk, but run down to your local securities lawyer and tell him or her — it’s better to whisper loudly — that you’re starting a hedge fund. But don’t say starting, say “launching.” You need to talk the lingo. And tell that attorney that in lieu of payment, they’re going to be getting a better deal — a stake in your BlackTreeGraniteAdvisers Capital LLC (trust me, it’s a great name). Once the domain of elite, sophisticated Wall Street traders, it’s never been easier for the average Joe to start making big money in the hedge-fund world.

What follows are four sure-fire, illegal Hedge Fund methods to making money: 1)Insider trading; 2)betting against the clients your advising – setting them up for a sucker punch; 3)pump and dump commodity trading or precipitating stampede trades into short holdings; and finally 4)a well constructed Ponzi scheme. The key point- relaxed financial regulation is the key to success; and now is the best time to “just do it“.
Some Recent Federal Financial Regulatory Successes
Now the Federal Financial agencies have been scoring some victories against massive financial mischief as implied by David Weidner. The Raj Rajaratnam case has struck what appears to be the first blow against pervasive “insider trading” [disclosure to financial friends of market moving info well before full “public disclosure” then illegally trading based on that info]. Other cases may follow against huge Hedge Fund traders. Also Tax evasion practices have been hit with a key succesful prosecution where hundreds of millions were illicitly made. So there have been success.

But treasury Secretary Tim Geithner has just warned about  the war of attrition being waged against financial regulation.

“You’re seeing some people run a war of attrition against the reform act,” Geithner said at an event today in Washington, without identifying the people. “They’re trying to starve the agencies of funding so they can’t enforce protections for investors.”

Geithner also said opponents of the Obama administration are trying to block presidential appointments to regulatory agencies “as a way to get leverage over the outcome, and they’re trying to slow down so that they can weaken over time the thrust” of the Dodd-Frank financial overhaul law. “We’re not going to let that happen.”

And there are signs of this power everywhere. The Republican power of delaying appointments and budget appropriations to expanded agencies whose regulatory workload has been increased markedly is just the tip of the problem. Given the Supreme Court’s blessing on the unfettered voice of money in politics, financial institutions and players are taking advantage of their super wealth to shape policy to their own ends. Nowhere is this more apparent then in the attacks on Elizabeth Warren, acting head of the Consumer Financial Protection Agency. Given the outrageous manipulations in the mortgage markets, Ms. Warren has worked to setup an Consumer Financial Protection Agency that has teeth in working against the large scale financial manipulations like the recent robo foreclosure signings and foreclosure frauds. The recent skirmishes in the Republican House hearings have become testy to the point of unheard of incivility. In sum, the after years of neglect under the Bush Administration and continuing delaying tactics by Republicans in both Houses of Congress, long overdue financial regulation is starting to take hold. But using their Republican mercenaries, the Finacial community is fighting back with its most effective weapon – campaign and lobbying dollars. If Tim Geithner says its a war – it truly is.

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