Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as though nothing had happened.
~ Winston Churchill
We are swimming in deficits globally. Many governments, financial institutions and consumers have been spending more than they take in for decades. For a while, it even became fashionable. It's not anymore. But for all of the ink and pixels spilled over the lack of money, it seems to me that we are facing a few deficits that are a little more ominous, a lot more disturbing, and stubbornly pernicious.
For all of our political correctness, civilization, and progress, we still seem to exhibit massive deficits in responsibility, accountability, and perhaps most elusively, integrity. Our entire financial system rests on trust. Without transparency, it all falls apart. There have been many reasons for our trust to waver over the years, but the question today is whether the frequency, intensity, and repercussions of the violations we have seen lately have finally caused us to collectively walk away from the economic system as we know it (or thought we knew it) and get back to basics.
Market Integrity as Anachronism
Market integrity, like truth itself, is more of an ideal for which we strive than a realistically achievable goal. If we don't attain it, but remain always close to it, we should be OK. Problems arise, however, when we lose sight of what it really means and allow it to become as anachronistic as polite discourse and mutual respect.
Market integrity, according to the IFRI (International Financial Risk Institute), is defined as “the need to ensure that markets operate fairly and safely in order to encourage the widest possible confidence in them, thereby promoting high levels of savings and investment.” Regulation of markets should involve the following:
- Integrity of Price Formation: Market prices should accurately reflect supply and demand fundamentals.
- Prevention of Manipulative Behaviour: Deliberate attempts to distort market prices should not be allowed. (Many knowledgeable market participants are likely spewing their beverages at this one, given that it's increasingly evident that many regulatory authorities and branches of government have themselves been guilty of such distortions – see GM bondholders for one of hundreds of examples.)
- Sound Legal Basis for Financial Dealings and Adequate Laws for Consumer Protection: We need effective insolvency laws and a stringent code of conduct for sales. (Again, I think I hear laughter.)
Can You Handle the Truth?
The truth is out there, if only we take the time acknowledge it. Sometimes it's as plain as the smirk on Lloyd Blankfein's face. Often, however, it is revealed by writers, filmmakers and other rabble who pursue endeavours not generally considered “real jobs”. Blankfein views his daily harvesting of others' poker chips as “God's work”, whereas folks like Brooksley Born, Elizabeth Warren, Bob Ivry, the late Mark Pittman and others foolishly try to point out that the Emperor's new clothes are, well, reality-challenged.
Many of us (myself included) would prefer to believe that, although there are some dishonest people out there, maybe even a few at (gasp!) the highest levels of leadership, we live in a reasonably well-functioning democracy. The events of the past two decades, however, are conspiring to paint a less optimistic picture. Space limitations prevent me from listing all of the nefarious dealings, but the following are a few links to documentaries, news stories and blog entries that should serve to remind us that we need to remain vigilant in our leadership choices, active in the public process, and attentive to our personal financial situation. Incidentally, CBC is currently airing a four-part documentary on the financial crisis called Meltdown. I was able to catch Part 1 and I thought it was excellent.
Brooksley Born vs. Alan Greenspan, Robert Rubin, and Larry Summers
In the latter part of the 1990s, CFTC Chair Brooksley Born became concerned about the growth of OTC (Over The Counter) derivatives. PBS produced an excellent documentary called The Warning that detailed Ms. Born's concerns and subsequent muzzling by Greenspan and company. Ms. Born's warning has since proven to be all-too-prescient as the proliferation of derivatives significantly contributed to and complicated the recent financial meltdown. Ironically, Messieurs Greenspan, Summers and Rubin have gone on to become revered stewards of various portions of our financial system while Ms. Born has faded into the background. What's the antonym for poetic justice?
Enron: Partners in Crime
If you haven't seen Enron: The Smartest Guys in the Room, I would highly recommend it. Everyone knows that Enron manipulated the energy markets to the detriment of California electricity customers as well as Enron employees and investors. The devil (literally in this case), however, is in the details. When you hear some of the recorded conversations of Enron traders and realize just how low these guys stooped with the support of the U.S. government, you may just get angry enough to truly question the status quo.
Mr. Paulson Goes to Washington
Henry Paulson is now known predominantly as the U.S. Treasury Secretary who presided over, and, according to some, helped resolve the financial crisis of 2008. More knowledgeable observers, however, realize that it was sheer poetic justice that Mr. Paulson was asked to clean up the pile of excrement that he himself helped to create. In 2004, Henry Paulson, then C.E.O. of Goldman Sachs, led a group of investment bankers to lobby the Securities and Exchange Commission to relax capital requirements so that these banks could take on more debt. We all know how that turned out.
An Enormous Serpentine Rescue
TARP, the U.S. government's Troubled Asset Relief Program, was ostensibly intended to rescue the global financial system, but somehow Wall Street bonuses were restored and the unions were bailed out while middle class citizens foot the bill. TARP reportedly weighed in at about $US 700 billion dollars. Mark Pittman and Bob Ivry of Bloomberg, however, have done some pretty compelling math and submitted that the actual cost of the bailout is closer to $US 12.8 trillion dollars – that's 18 times the amount reported for public consumption.
In fact, Bloomberg has successfully sued the Federal Reserve to compel them to reveal precisely how much money was spent or promised and to whom these benefits accrued. The Fed has appealed these decisions – and lost. Their next step is an appeal to the supreme court. An old proverb says that truth fears no questions.
The Beat(ing) Goes On
The examples cited above don't even scratch the surface of our huge integrity deficit – from the ludicrous IPO of a taxpayer-supported automaker, to the SEC suing the state of New Jersey for fraud, to a bank with ties to President Obama receiving preferential treatment, there are many more tales of deception to be told. (I didn't even mention Bernie Madoff!) How many more of these truths will we stumble over before we stop and take notice rather than hurrying off or planting our heads back in the sand?
The current glaring lack of market integrity is precisely what keeps my money out of the long side of the market. Apparently, I'm not alone as insider selling outpaced buying by over 650 to 1 in the past week as the markets rallied. There may or may not be another nuclear problem percolating below the surface in some corner of the financial system right now. But history shows, gentle reader, that if there is, you and I will be the last to know.
Has the lack of transparency in the current economic and political climate affected your personal financial choices?