For Investors, The Bad News Never Ends
Below is a recent article published by Securities Lawyer Jake Zamansky on Forbes.com - 07/25/12
Wall Street, it seems, just can’t stop deceiving investors and manipulating the markets. That duplicity is embedded in its business culture.
The 2008 financial crisis exposed how Wall Street firms misrepresented the value of their opaque mortgage-backed securities and the fact that they were leveraged as much as 40-to-1.
Recently, we learned that a cartel of banks, headed by Barclays, manipulated the LIBOR interest rates, possibly in a criminal way. An article in the Economist, not exactly a publication known for hyperbole or unfairly attacking bankers, explained how the scandal laid bare “the rotten heart of finance.”
Now, we learn that the multi-trillion-dollar “credit-default swaps” (CDS) market, those obscure weapons of financial mass destruction that almost sank AIG and helped torpedo the world economy, is also ripe for potential fraud and manipulation. Remember, credit-default swaps are insurance-like derivatives that protect investors from bad events like a company going bankrupt or a country failing to pay its debts.
Indeed, the CDS market appears to be yet another market that Wall Street can manipulate to enrich themselves.
The New York Times reported on the CDS cartel last week. It is one more “open secret” of Wall Street that will, in our opinion, work to harm investors.
“The (LIBOR) rate-manipulation scandal has demonstrated that banks will collude with one another for their own benefit,” Jesse Eisinger reported. “Banks didn’t report the rate at which they were borrowing from other institutions. They could report a made-up rate that, not surprisingly, turned out to serve their economic interests at the time. So, it might come as a worry that there is another, multi-trillion-dollar market-the credit-default swap market-that operates under a similar principle.”
The comparison of LIBOR rate collusion to the management of the CDS market is terrifying.
The Times report continued: “A proper market would want an organization that was impartial, regulated, transparent and open to appeal. No such luck. The (CDS) determinations committee has 15 members, 10 of which are the major dealers in credit-default swaps, the giant banks that are effectively permanent members. One criterion for dealer members is that they trade a certain amount of derivatives. After the 2008 financial crisis, there are fewer such firms, and they have consolidated their influence and power over our capital markets. The committee makes decisions without having to publish its reasoning and almost never has. There isn’t any appeal process. The committee itself says it isn’t bound by precedent.”
The Times concludes that the CDS market has not yet fallen to the LIBOR banks’ level of corruption. But that could change. “To the market’s credit, there is no evidence that the process has become corrupted by big banks,” the paper noted. “Given the evidence of collusion in the rate-manipulation case, however, trusting it to remain that way doesn’t seem like a good plan.”
Oversight might be helpful here. But the new financial regulations under Dodd-Frank, while pushing most derivatives of the plain-vanilla kind onto clearinghouses and bringing additional transparency, doesn’t address this issue.
Other possible remedies seem pretty apparent. Banks could disclose their positions ahead of rulings. The committee could publicly explain its reasoning, which the association says it’s planning to do, and there could also be an appeals process.
The fact that banks haven’t taken these steps on their own is a display of the industry’s casual disregard for any significant checks on their cartel businesses. It’s a situation that has become so routine on Wall Street as to be unremarkable.
What scandal lies at the next turn?
With every facet of the investment game seemingly rigged, it’s no wonder investors have lost faith in the market.
Where does it all end?
Disclosure: Zamansky & Associates are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions.
Read article by Securities Fraud Lawyer Jake Zamansky on Forbes.com