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 A relatively obscure case in Norway shows just how different the United States is from the rest of the industrialized world.
  The Oslo Stock Exchange was halted by unusual trade action. It seems two Norwegians were trying to manipulate stock prices.

 We believe the two are behind a number of cases of price manipulation. They have set purchase and sales orders that have not been real, because they have had another motive, namely to move prices, "said Stenberg.

 In other words, they did exactly what every single bank on Wall Street does every single day. In New York it is called High Frequency Trading. In Oslo it is called getting six years of jail time for breaking the law.

 So who is right? Is Norway some Socialist Hell for not allowing the free market to work, allowing faster traders to skim profits from slower traders? Or are laws in the United States too lax, allowing people to take money from the system without adding any value, thus destabilizing the economy?

  To answer that we need to look at a couple more examples.

Engineered Failure

 The Financial Times had an overlooked news story the other day. Believers in the recently passed financial reform should be shaken all the way to the bone by it.

 The hedge fund strategy pioneered – and made notorious – by Long Term Capital Management is returning to prominence amid one of its most successful years yet, aided in large part by the massive issuance of bonds by the UK government and other sovereigns.
  Fixed-income relative value trading – shunned by investors after the collapse of LTCM in 1998 – has been one of the industry’s few outperformers this year, thanks to massive pricing anomalies caused by fiscal stimulus packages and unconventional central bank monetary policies around the world.

 There are two disturbing qualities to this news.
 The less disturbing part is that the amount of central bank intervention is causing huge distortions in world bond prices, distortions so large that politically connected entities can front-run the news and make enormous amounts of money.

 The more disturbing part is that the same practices that collapsed LTCM, and nearly collapsed the world bond markets in 1998, are surging again. For those of you who don't remember, the collapse of this one hedge fund nearly froze up the world's bond markets. The Fed had no choice but to backstop the major Wall Street banks when they bailed out LTCM.
  The very next year, the same people who ran LTCM set up another hedge fund that operated on the same basis as LTCM, and it failed again in 2009.

  It causes a person to ask: what benefit is there for the general economy, and society in general, by allowing this practice to continue year after year?

Robbing from the poor and giving to the rich

 The talk on the right-wing airwaves these days is all about greedy public unions and those symbols of overpaid bureaucrats: schoolteachers, firefighters, and policemen. What hasn't gotten nearly as much attention is a very different reason why our cities are broke.

  Jefferson County, Alabama, is broke. The reason it is broke is because of J.P. Morgan Chase sold them shady financial derivatives swaps that backfired. The reason that Jefferson County engaged in a financial product that they didn't understand was less a matter of country-bumpkins buying things they couldn't spell, and more of a case of being maneuvered into the situation.

 West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks.
  They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer dollars.

 This is a case of nationwide fraud. Yet no one has gone to jail over it. The same banks listed above were also involved in the Enron Scandal. They were at the heart of the 2008 financial meltdown. Yet none of them are in jail. Do you think the Norway government would treat them so easy?
   There is a cost to their thievery. Take a look at Jefferson County today.

 McTerry is playing catch-up financially. Registering four kids for public school has made a real dent in the bank account of this single mom, who works part-time. As she leans on a folding table - one of only two pieces of furniture in her living room - she does the math.
   "Oh..... three or four hundred dollars! We had to do fees... and I didn't get everything either. I got the stuff that they needed. All the optional things, I told them they'd get it as time go."
  What they got was school supplies, a locker, an assignment book and t-shirts that they’re required to wear on all field trips. McTerry also paid a "mailing" fee that covers any papers the school has to mail to her home.
...
 Add the locker fee and the "voluntary donation" of $100 that the school asks from every child ... plus the 650 dollars for the marching band – and Fernow is paying just under one-thousand dollars.
  Fees like this are common in Alabama, where many school systems are facing budget cutbacks. Principal Ron Griggs at Thompson High School in Alabaster says he’s already taken the lightbulbs out of the soda machines in the hallway to save money on electricity.
  Alabama's not alone. Across the country in financially-strapped states, schools are increasingly asking parents to pay for supplies that used to be provided by the schools - even toilet paper for the bathrooms, according to Katie Campbell, president of the Alabama PTA.

 Pay for your own toilet paper at school? Seriously?!? Locker fees. "Voluntary donations". It looks like the public school system is on the verge of system failure.
  Meanwhile, Wall Street bank executives are giving themselves record bonuses after tricking cities and counties into crooked deals. Why aren't these people in jail? And why are we blaming schoolteachers or this mess?

Love that narco-terrorist money

  A year ago the Pentagon released a report concluding that "Mexico is at risk of becoming a failed state" and beginning to resemble a narco-terrorist state.
  It turns out that the reason for Mexico's tragic condition was because American banks were financing the drug trade.

Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

Laundering drug money is a very lucrative business to be in. This also isn't the first time that the banks have been caught with blood-and-cocaine-covered hands.
  Every time it happens the banks cut a deal and pay a fine. No jail time. The authorities are after the drug runners, not the banksters.

  No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

That may sound insane to you and me, but the banks are merely following the example set by the largest banking regulator in America - the Federal Reserve.

(Bloomberg) -- Last week the New York Federal Reserve made what may go down as the most misguided move in the history of the Federal Reserve system. They laundered money for North Korea.

 As far as I can tell, no one suffered any punishment for laundering North Korea's money, so why should anyone at a private bank do jail time?
 
 Stealing money is like a drug. There is always a "gateway" drug, and that gateway drug for Wachovia (before they turned to real drugs) was their own customer accounts.

 Last spring, Wachovia  bank was accused in a lawsuit of allowing fraudulent telemarketers to use the bank’s accounts to steal millions of dollars from unsuspecting victims. When asked about the suit, bank executives said they had been unaware of the thefts.
  But newly released documents from that lawsuit now show that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes.

 Let's not pick on Wachovia. They were just more crass about their mafioso business. The other major banks are much more classy about their generational theft. Well, at least they took the effort to make it look legal anyway.

 Slowly, as the pieces fit together, we shared a horrifying epiphany: the banks, corporations and investors acting in each global region were the exact same players. They were a relatively small group that reappeared again and again in Russia, Eastern Europe, and Asia accompanied by the same well-known accounting firms and law firms.

Clearly, there was a global financial coup d’etat underway.

 To put this into perspective, I want to bring in my favorite financial regulator - William K. Black.
  When he was in charge of cleaning up the S&L Crisis, he managed to jail a thousand bankers. During those trials and investigations he exposed massive amounts of malfeasance. The current crisis is 40 times larger yet almost no bankers have been prosecuted.

 The Black interview starts 13 minutes in, but the first 13 minutes are pretty good too.

In an alternate universe

 Suppose the U.S. government had posted a budget surplus in 12 of the past 13 years. Suppose not a single major American financial institution had failed or needed a government bailout. Suppose the U.S. economy grew at an annual rate of 6.1 percent in the first quarter of this year, rather than at 2.7 percent.

 This would be a dream for the United States, but it is the reality for Canada.
  So how did Canada manage to avoid our disastrous outcome? How come housing prices in Canada rose 14% last year, while ours dropped? How come the Toronto Stock Market did better than our stock market last year? Is it because they are better, smarter, more virtuous people? Is it because their government did more stimulus packages, and their central bank dropped interest rates further? No, no, and no.

 The reason Canada managed to avoid our economic disaster is because they made a conscious decision to regulate their financial industry and adequately staff their regulatory agencies.

 Canada has long had its Financial Consumer Agency, which stops the craziest of lending practices. Canada regulates mortgage terms so that borrowers -- be they greedy, reckless or plain suckers -- are less likely to crumple when, sometime down the road, an interest rate jumps.
  Yell all you want about Americans who borrowed beyond their means. Canada had rules that stopped people from borrowing beyond their means. As a result, Canada was spared a U.S.-style housing bubble, which was fed in part by the ability of little people to borrow big and use the money to bid up home prices.
  By the way, Canadian home prices rose almost 14 percent in May from a year earlier. And the World Economic Forum now ranks Canada's banking system the safest on earth.

What a crazy idea. Using regulators to get rid of the gamblers and predators, while making it safe for investors and average citizens. That's so America, circa 1960's.
   Maybe, one day, people will acknowledge that the financial regulations of the 1930's were there for a good reason, and like the Constitution, were based on ideas that don't become outdated.

Originally posted to gjohnsit on Wed Aug 18, 2010 at 09:47 AM PDT.

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