If U.S. investors stopped trusting the market, the world’s economy would collapse.  During the great depression stocks lost 85% of their value causing a public outrage directed at the U.S. Government.  The collapse was fueled by company fraud, over-speculation, stock manipulation, and dishonest brokers.  Over lapping today’s financial crisis, one can’t help but see the comparisons. 

At the forefront of today’s economic problems is a lack of oversight and regulation of the world’s financial products, and the investment companies that trade in securities products which are unregulated.  For the first time since the Great Depression of the 1930’s, we have had a proliferation of unregulated and off exchange traded securities instruments.  These instruments bind counter parties together under contractual obligation to one another without the regulation of the Securities and Exchange Commission.

The importance of a financial intermediary between counter parties can not be emphasized enough.  An example of a financial intermediary is the New York Stock Exchange, which provides several functions in maintaining an orderly liquid market for listed securities.  The organization operates three divisions: Market Surveillance, Enforcement, and Listed Company Compliance.  It is because of this oversight and regulation mandated by the SEC in 1933 and 1934 that brought investors back after the crash of 1929.  The NYSE is an example of a financial intermediary that ensures investor protection as the largest stock exchange in the world. 

What is the most absurd suggestion being produced from government officials and high powered bankers is the removal of the only regulation that worked during this fiasco.  According to the Financial Accounting Standards Board (FASB), accounting for derivative instruments and hedging activities, commonly known as FAS 133, requires all derivatives within the scope of FAS 133 to be recorded at fair market value as an asset or liability.  So the failure in the most recent financial crisis is not because the accounting standards were absent, it was the absence of securities regulation from the SEC covering financial product guidance and oversight.  They (SEC) did not require the registration of the derivatives on an exchange.  There was a brief period in 2006 when the government tried to force their ability to regulate hedge funds.  However, on Friday, June 23, 2006, the U.S. Court of Appeals for the District of Columbia Circuit (”Court”) overturned the Securities and Exchange Commission’s enacted rule requiring many “hedge fund” managers to register as investment advisors under the Investment Advisors Act of 1940.  As far back as December 2004, the Commission (SEC) tried to regulate the unregulated investment managers of hedge funds.  This should clearly explain that the SEC is only half at fault.  Their failure needs to be reserved for the ineffective ability to force derivatives onto a listed exchange.  Ultimately the U.S. Court of Appeals from the district failed to grasp the implications of their decision in total. 

This is the tip of the iceberg.  The future stories will provide fodder for many would be authors.  Ultimately, Bernie Madoff’s confession ensures he will be the most recent poster child to be hung up over Kenneth Lay’s Enron.  But lets not forget some of the earlier stars of financial fraud, who headlined during the greatest bull market in the history of the U.S., Charles Keating, Ivan Boesky, and Michael Milken.  

Posted on Tuesday, February 17th, 2009 at 3:09 pm. You can skip to the end and leave a response. Pinging is currently not allowed.

"Greg Gilbert and James Simos" are registered representatives of FINRA member firm, "Infinity Financial Services."