Thursday, April 22, 2010

Financial reform

At this time last year, in this blog entry, people in the know thought I was in left field when I suggested OTC derivative trading should be brought out of the shadow banking system and on to an exchange to increase transparency and reduce opacity. This eliminates the side bets between parties and improves the price discovery mechanism of free markets. The reason why my skeptics thought my suggestions would never occur is because it would be like trying to change the stripes of a tiger--trading is what banks do to increase profits. That's another discussion: the role of banks as customer service centers--or casinos gambling via their own proprietary trading desks--under the implicit understanding that they will be bailed out by taxpayers if their bets turn sour.

Lo and behold, a year later, the Obama Administration and both Houses are advocating such reforms, but this is not an exercise in self-aggrandizement on my part. Why? Because these reforms won't prevent fraud. While these reform proposals may indeed create more fluid markets, reducing spreads and transactional costs, and more importantly, level the playing field to some extent, it has consistently been proven that our financial market exchanges are rigged by malcreant players, including the big banks, hedge funds and our complicit government agencies themselves. In other words, this won't curb fraud and thugster market manipulation. Business as usual...

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