Today’s Financial Markets Aren’t Honest

Posted by Jeff Carter
on July 9th, 2012

The LIBOR scandal in Europe is only the latest to rock financial markets over the past several years. Are we done yet? I doubt it, because it looks like to me that government regulators on all sides of all ponds are also at fault for a lot of the dishonesty that is rocking the marketplace.

It is looking more and more like the Bank of England(BOE) gave a wink and a nod to Barclay’s and other banks to misstate the actual LIBOR rate to give the appearance of financial sanity. This had ripple effects into other financial marketplaces. LIBOR fixing isn’t a vacuum.

The root cause of the US financial crisis wasn’t the banks, it was Fannie Mae and Freddie Mac giving bad economic incentives for banks to build the house of cards that fell. Because SEC regulations are so dishonest, many banks, like Goldman ($GS), were able to trade against their customers and make money when the crisis hit.

In the whole TARP bailout, some banks that didn’t need to take funds ($WFE) were forced to take funds by US regulators. It was all for the sake of appearances. Any legislator that voted against TARP at the time was vilified, but now they are vindicated.

We have had individual scandals like Bernie Madoff, and Jon Corzine and “leadership” at MF Global. Every day, there are other less publicized frauds, ponzi schemes and snake oil salespeople out there that you don’t read about. By the way, Dodd-Frank has done nothing to stop them.

In China, crony capitalism (or is it state sponsored capitalism) has left a lot of bad loans on bank books that we don’t know about. Economic data out of China and other companies is deliberately played with to make it look better than it really is.

Markets are full of deliberate structural imperfections. Built in through bad regulation, customers are given short shrift. Dark pools, trading against them, payment for order flow, needless layers of distribution all add to more customer costs and more abuse. The SEC isn’t there to protect customers. It is there to protect the big banks that are now in bed with the government because they were deemed too big to fail.

Then there are the governments themselves. They aren’t being honest with their constituents. How else do you think governments in states like Illinois were able to hide their pension problems all these years? (Illinois carried them on the books at a 9% discount rate, not a 4% rate, understating the liability by billions). Until governments square with the populace, there will always be a distrust of everything that comes out of their legislative bodies no matter who is in charge.

How is an average investor supposed to have confidence in what is almost certainly a rigged game? No one can really blame them for shying away from investing as they have over the past five years.

The only answer is to end the charade. Transparency is the great truth detector. When markets are free and competitive with transparent information, they work better than anything else to allocate capital and provide fairness. No government regulator or tax or rule can do better than the free market.

When the charade ends, confidence will come back. Investors will return. But only when the charade ends and the curtains hiding all the warts come down.

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