Intro by Ilene
In Bed with Wall Street: The Conspiracy Crippling Our Global Economy is a great read for those seeking to understand our financial system's failures and the reasons the global economy ceases to function properly. Larry Doyle highlights the shenanigans of FINRA (Financial Industry Regulatory Authority), the uneven-to-nonexistent oversight by the SEC, the corrupt culture of Wall Street, and the Street's self-serving entanglement with the government.
While readable and enjoyable, Larry's new book could serve as a comprehensive treatise detailing the failure of self-regulation and systemic conflicts of interest. The revolving door between the financial industry and its regulators, whether in self-regulatory agencies such as FINRA or in government, promotes capture and corruption. Unfair practices such as extra-legal taxpayer bailouts, failures to prosecute, High Frequency Trading (HFT), and "permissible" insider trading are symptoms we see every day.
Excerpt (pp 160-164)
The behavior of selected individuals and institutions needs to be exposed and properly adjudicated if capitalism is to exorcise the cronyism that was core to the fraud. James K. Galbraith, the chair in government and business relations at the University of Texas at Austin, understood this. Galbraith addressed the Senate Judiciary Committee’s Subcommittee on Crime in mid-2010 and laid out the shortcomings behind and the fallout from our economic crisis. His exquisitely detailed testimony skewered his own profession, the study of economic theory, for its failure to properly delve into and understand systemic financial frauds. In point of fact, leading into the current crisis, Wall Street curried favor with academics by paying them to produce research supportive of practices and market developments central to the perpetuation of fraud.
Galbraith methodically detailed the manner in which a control fraud—when a trusted person in a position of responsibility subverts the system/company for personal gain—develops, flourishes,perpetuates, and ultimately fails. The failure of the fraud, though, belies the fact that many of the perpetrators walk away filthy rich. The fraud itself and the injustice running throughout the system are predicated on a failure of the rule of law in mandating and upholding legal contracts. These failures have been propagated by our government, regulators, ratings agencies, a wide array of financial institutions, and individual citizens as well. As frauds go unpunished and moral hazards propagate, our nation has seemingly become inured to the growth of other frauds and moral hazards.
We have seen evidence of this dynamic in areas like union-dominated pension schemes and personal consumer behaviors, including the intentional nonpayment of debts with the expectation of not being penalized. Just as banks were bailed out, an unhealthy “bail me out too” mentality has taken hold in our nation. What is the result? The abuse of capitalism persists unabated under the guise that every criticism threatens to tear down the economy, and every measure of support for our economy is prioritized over upholding our legal system and embracing a sense of moral decency.
Galbraith harkened back to a period in our nation’s history when a sense of decency and meaningful justice for all was central to our national fabric: “Some fraud is inevitable, but in a functioning system it must be rare. It must be considered—and rightly—a minor problem. If fraud—or even the perception of fraud—comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.”
Galbraith understands and shared that no amount of support provided by the Federal Reserve or any other governmental or private entity can disguise the inestimable price borne by our society from a deeply buried yet unpunished control fraud. The monetary valueassociated with this price pales in comparison to the national decline in trust felt by a citizenry disgusted by those who have continually failed to uphold the rule of law: “In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.”
Galbraith would have impressed Pecora. Yet Congress and the Department of Justice have largely failed to act upon Galbraith’s recommendations. Galbraith was not the only one directing the FCIC and Congress to act. While the FCIC was engaged in what ultimately looked like shadowboxing, others with extensive background in exposing shady financial dealings were also speaking out and impelling Congress to look hard at FINRA, most notably, the longstanding proponents of transparency at the Project on Government oversight (POGO).
Well-positioned in Washington and with unquestioned credibility, POGO delivered Congress a detailed road map of FINRA, outlining numerous concerns in a February 2010 letter to the House Committee on Financial Services, the House Committee on oversight and Government reform, the Senate Committee on Banking, Housing, & Urban affairs, and the Senate Committee on Finance:
- FINRA has attempted to expand its authority despite its abysmal track record. In scaling a bar held barely inches off the ground, “FINRA Chairman and CEO Richard Ketchum testified that FINRA should be given the authority tooversee investment advisers in addition to Securities brokerage firms. In an attempt to justify this expanded authority, Ketchum argued that FINRA has a ‘strong track record in our examination and enforcement oversight.’”
- Regulators awarded executives outrageous compensation packages, even during the height of the crisis. “Tax documents show that in 2008—a year in which FINRA also lost $568 million in its investment portfolio—the organization’s 20 senior executives received nearly $30 million in salaries and bonuses.”
- FINRA failed to warn the public about ARS.
- The incestuous relationship between FINRA and the Securities Industry, as exemplified in the complaints brought on behalf of Amerivet Securities, Standard Investment Chartered, and Benchmark Financial, and in the well-oiled revolving door between FINRA and a host of industry-related firms.
- Investors and taxpayers have been forced to foot the bill for regulatory ineptness or malfeasance. The direct and indirect costs of which are incalculable given the trillions of dollars in bailouts and the pain caused by our ongoing economic crisis.
- It is now time to challenge the government’s reliance on SROs. Given the inherent conflicts of interest in the financial self-regulatory model, one is hard pressed to accept the efficacy of just such a system, and as such, “POGO calls on Congress to consider vastly curtailing the power of SROs.”
With all of those land-mines within FINRA, to think that the FCIC totally overlooked this organization speaks volumes as to how deeply the commission really cared about looking for the root causes of our economic crisis.
One would think these four major congressional committees would have to weigh in with some sort of opinion on such a detailed appeal as that put forth by POGO. But with the bulk of the issues within POGO’s letter still unresolved and the crisis enduring, the American public is left wondering if POGO’s letter was even read by those atop Capitol Hill. POGO’s Michael Smallberg informed me, “No one from the committees responded to our 2010 letter. But we did hear from a number of investors, shareholders, reporters, and Securities brokers who told us about a host of problems at FINRA.”
Of course, most of the American public has little understanding or appreciation for the impact a massively conflicted financial self-regulatory model has upon their lives. That said, one would hope and expect that our elected representatives sitting on committees charged with financial oversight would be well versed in the issues relating to this topic. Do not be so sure. Smallberg works deeply within these spheres and offered a stinging rebuke of some on the aforementioned committees in stating that he “suspects there are some committee members who have never even heard of FINRA.” That assessment is certainly disappointing but not overly surprising given the general lack of meaningful financial intelligence displayed by congressional members in a variety of Wall Street related hearings.
Read Larry Doyle's whole book: In Bed with Wall Street: The Conspiracy Crippling Our Global Economy
Visit me at Market Shadows.