The Financial Industry Regulatory Authority turns five years old today. Here’s what it’s done:
Is this enough? Someone knowledgeable tell me what to think.
“If regulation is not the answer, then how can corporations and society prevent fraud in the future? Fastow said we can begin by understanding that structured finance is like steroids: a little can cure many illnesses, but a lot can destroy your organs.
Its use needs to be limited, and investments in firms that use structured vehicles without a clear business reason should be avoided. Mark-to-market accounting can lead to more transparent financial statements but, if abused, can put a company in a hole that it can’t climb out of. The market must value transparency. Companies with the fairest disclosures must be rewarded, not placed at a disadvantage as is now the case. Finally, executives must ask whether a transaction is consistent with the principle and not just the rules. Are they doing it for window dressing or for valid business purposes?”
— Former Enron CFO Andy Fastow reflects on the importance of following principles and not just rules - “If the Auditors Sign Off, Does That Make It Okay?”
When I came to Wall Street in 1954, investment banking was a profession, one that financed the building of this country’s industrial capacity and infrastructure. We financed pipelines that brought cheap natural gas to the households of New England. We financed the development of new drugs, which are now the mainstay of today’s health care. We financed inexpensive restaurants that made eating out affordable for families and do-it-yourself home stores that enabled people to improve their quality of life. We financed the earliest personal computers, which ultimately led to the Internet Age. All of this fit within a framework of activities that didn’t threaten this country’s finances, much less the world’s.
But year by year the industry’s emphasis moved away from this purpose and toward financial innovation for financial profit’s sake. According to the Federal Reserve’s Flow of Funds data, from 1980 to 1982, the financial sector accounted for an average 12.8 percent of U.S. total corporate profits. By 2005 to 2007, the three-year average was 23.8 percent.
An operations executive from the firm was scheduled to give a presentation on settlement risk management. But one trader at the firm allegedly used his knowledge of UBS’s back-office operations to fake trades over the course of several years. Adequate settlement risk management policies would have easily uncovered the fraud.
New York Times:
“Regulators at the Securities and Exchange Commission have been looking at changes in the markets and automated trading strategies in connection with volatility. The market is no longer based on one single exchange but is fractured across four big exchanges and several smaller forums. High-frequency traders, using powerful computers to trade at exceptionally high speeds, now account for up to 60 percent of daily turnover.” [Market Swings Are Becoming New Standard]
Securities Technology Monitor:
“According to the Liquidnet Institutional Voice Survey, more than two-thirds of traders at leading asset management firms around the world are concerned about the impact of high frequency trading (HFT) on the equities market.
“At the top five global institutions, 73% of the traders said they regarded high frequency trading as a high-priority market-structure issue, according to Liquidnet.
“The firms polled collectively manage equity assets of more than $13 trillion. Liquidnet’s customer base includes 630 institutional asset management firms.” [3/4 of Institutions Concerned About High-Frequency Trading]
So, neither regulators nor large institutions particularly like the technology that now dominates the financial markets. I suppose that’s worth noting.
I originally wanted to fly it over Washington, D.C., but learned that you can’t do that. So I chose Wall Street instead, but didn’t specifically intend it to fly over S&P. I’m just a mother from St. Louis who feels the only reason we got downgraded was people in politics.