After the September 2008 financial crisis, scandal after scandal revealed widespread gaming of financial markets: LIBOR rigging, deceptive origination of subprime mortgages and student loans, built-to-fail collateralized debt obligations, mortgage loan and student loan origination fraud, foreclosure fraud, deceptive selling of ancillary credit card products, currency manipulation, commodity manipulation, so-called rogue traders losing billions in oversized positions in derivatives, electricity price manipulation, misappropriation of customer funds, oversized derivatives risks leading to the MF Global bankruptcy, futures manipulation, cover-ups of credit derivatives losses, manipulation of interest rate swaps, “programming errors” that flooded the equity options market with orders, equity quote stuffing, insider trading (or if you prefer, market abuse), banks’ laundering money for drug cartels, and more.

Every financial product took a mugging enabled by feral bonus-seeking executives free from the restraint of effective regulatory oversight.

Wrong-Way Leadership

In January 2007, Senator Charles E. Schumer and then New York Mayor Michael R. Bloomberg advocated less regulation for the financial services industry based on a study by McKinsey & Co. The study warned New York might lose its leadership position if financial services companies moved abroad due to stricter regulation.

Where did so-called financial leadership from New York get us?

New York was ground zero for financial malfeasance and the 2008 financial crisis. If financial services wanted to move abroad rather than comply with the few regulations that were actually being enforced, we should have said, Promise?

Contrast the tone of the now-disgraced McKinsey study (linked at the end of this article) with that of any competent analysis of the state of global finance. Control fraud thrived, because the U.S. regulatory system is bloated and corrupt.

SEC: Fearful Regulator “Punching a Ticket”

For example, on April 7, 2014, Robert Schmidt at Bloomberg News reported on James Kidney’s remarks upon his retirement as a litigator for the Securities and Exchange Commission:

“I have had bosses, and bosses of my bosses, whose names we all know, who made little secret that they were here to punch their ticket. They mouthed serious regard for the mission of the commission, but their actions were tentative and fearful in many instances.”

Recently, the SEC’s proposed rulemaking to amend Regulation A-Plus, part of the Jumpstart Our Business Startups Act (JOBS Act) was so ludicrous, the SEC risked being decommissioned.

We don’t’ need yet another ineffective regulator, we don’t need new rarely-to-be-enforced rules, we need streamlined effective regulation.

An Early Warning

My March 2007 remarks in a letter to the Financial Times are still applicable today to the entire financial market:

Subprime lending excesses have damaged US’s standing as global leader in finance

LETTERS TO THE EDITOR
Financial Times Published: March 19, 2007
From Ms Janet Tavakoli

Sir, We financial professionals in the US stood by and silently watched while risky mortgage loans were made to people with bad credit. Most of the consequences will fall on struggling minorities who thought they were being given the opportunity to create financial security, but instead they rode a Trojan horse loan to financial ruin.

We are witnessing the fall of the predators as US mortgage brokers implode. These thinly-capitalised Wall Street-funded operations sent financial snipers to Main Street. They promoted “truthiness” in lending, “truthiness” in prospectus writing, and are now becoming victims of their own excesses and conflicts of interest.

I could appeal to our sense of humility and social responsibility, but that would be naive and ineffective. Instead I will appeal to our sense of self-preservation. We blame Sarbanes-Oxley and onerous regulation for financial services moving abroad, but that is only part of the story.

Financial technology has allowed a small number of people to create a great amount of damage. We financial professionals in the US have squandered our credibility, our legitimacy and even respect for our financial expertise.

Truthiness is a word coined by Comedy Central‘s Stephen Colbert, meaning, “What you want the facts to be, as opposed to what the facts are. What feels like the right answer as opposed to what reality will support.” I have read several prospectuses of deals using subprime collateral, and there was a lot of “truthiness” involved in the disclosure of the implications of predatory lending practices combined with lax underwriting standards.

As our international customers realise this, we are dividing our supporters and uniting our critics, just the opposite of what is required to retain the US’s position as the centre and global leader in finance.

Our behaviour in the subprime market reveals aggressive arrogance. We acted as if we, the financially and technologically superior, were leading the forces of good against the empire of evil, the financially and technologically inferior, thus justifying our financial sleight of hand. We adopted a very dangerous posture for leaders in finance.

To lead effectively, we need the support, the trust and the confidence of the global financial community. Wall Street’s former standard, “Your word is your bond”, did not mean “Your spin is your shield”.

If we are unhappy that financial services are fleeing the US, part of the reason may lie in regulation, but part of the reason lies in the fact that, in areas where we are lightly regulated, our words are unworthy.

See also:

“Clear and Present Danger” – TSF on foreign-owned U.S. debt – October 31, 2011 revised November 17, 2013

“Repairing the Damage of Fraud as a Business Model” – Janet Tavakoli’s Presentation to the FHFA in Washington – December 8, 2010

“Sustaining New York’s and the US’ Global Financial Services Leadership” – McKinsey Global Capital Markets Survey, McKinsey & Co., January 2007 including introductory letter by Senator Charles E. Schumer and Mayor Michael R. Bloomberg.