The Market Ticker – 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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