Regulation is not welcomed by anyone. No industry or firm in the world would like to have restrictions and limitations to be put on it. Under the veil of free market capitalism and spirit of entrepreneurship, the moral and social values are shunned and governments have to force the industry to put checks and balances that the industry would never put on itself. The BP Oil Spill is one of the examples that can be used here where the company cut as many corners as was possible in order to maximise its profits and minimise its responsibility. This becomes relevant in contemporary finance as the crisis of 2008 and now the recent unveiling of same unethical practices by Peregrine Financial Group, MF Global, JP Morgan, Barclays and manipulation of LIBOR and HSBC money laundering.
Based on all these developments, there is a call for the heads of many of the people who not only made short terms profits, but hid losses that undermined the capital investor’s confidence in the transparency of the markets. The one belief that investors need in the market is that when they look at a statement, they aren’t given the rosy false façade that everything is fine. They would prefer the real picture. A picture that says things are not that great and tells the reasons.
The need to maximise the shareholder’s wealth has blinded the whole financial sector to ignore the interests of many of its other stakeholders. Again, the financial sector is the only one which is getting all the blame. The more concerning fact is that due to multiple facets and products that are used by the industry in a whole, there are entities that are able to circumvent the laws in one way or the other. For example, the recent reforms put in place by the CFTC were commended for limiting exposure and increasing accountability of future contracts in the US. But the truth is that they are lose in their application and in addition to that, the swaps and option markets can now fill in this gap by offering new products which still allow hedging and speculation provided by the futures. Without the underlying or vanilla future being offered or being exposed to its exposure, of course. Not to mention that new bills are now being considered in the Congress and Senate to override these bills?
This highlights the fact that financial markets have evolved so much that they can create financial products that are so vast and diverse that they cannot be regulated or controlled. It just goes to show that Wall Street has an ability to create new solutions for old problems and offer them in a new package. The only difference would be that the new product would not be stringently regulated or monitored.
The situation is made worse with the fact that even when regulations are being designed, they face severe criticism from the industry and everyone starts crying foul as soon as rumours of them getting enacted start flying. Any new tax, law or reform proposed is shot down as victimisation of the industry and they are used as a rationale to keep big government out of their pockets. The Dodd Frank Act is the most recent and sorry example of that. Before the recent scandals that came to light, the financial sector was doing everything in its power to strike down the laws and to make them as ineffective as possible. Their success can be seen in the fact that 3 years down the line and still no substantial laws have been put into place. The irony of the situation is by what is that JP Morgan was one of the companies pushing for these efforts and lobbying against the bill.
Before the discovery of the London Whale, or its beaching more appropriately, the bank was trying to fight the proposed reforms of the privately traded derivatives market. This is the over-the-counter and hidden market where many of the derivative products are traded and face no regulation or stringent checks at all. This practice has put the financial companies in a quandary. At one hand, they have to argue that regulations are bad for businesses and achieve nothing.
A better measure would be to let competition and firms themselves reach a consensus and code of conduct. On the other hand, they have to defend their malpractices that seem to be growing with every passing day. Congress has been mulling over the Dodd-Frank Act that has been proposed and they have faced opposition from the financial industry, however, now they have to save their face. They were even able to pass bills which took away the ability to enforce the measures away from the regulators. It’s any ones guess what could have transpired had these scandals not come to light.
The problem is that, first of all, regulation is opposed by all industries with a special disdain and it reaches a new level when it comes to the financial sector. Even though every decade sees a huge amount of scandals and malpractices being carried out, the financial sector always leaves with a rap on the hand until something much worse comes along which is the new thing but has the potential to destroy the system. The only difference is that it isn’t and it wouldn’t be the end of the system as we know it. Second, even when watered down version of laws are passed; financial institutions use their brain powers to come up with something new which beats the system without breaking the outdated rules.
The case of JP Morgan brings to light the reason why people hate these kinds of transactions and how they are covered up. First, JP Morgan carried out risky trades which were not justified in their investment rationale and then to make it worse, hid the losses from everyone. Losses are a part and parcel of companies so publicising them doesn’t mean the end of the company. The deceit that was carried out by JP Morgan is the main reason for the outrage where people cannot believe that whether the $2 billion loss being shown is correct. While we are on that note, the losses that have been revealed till now amount to more than $5 billion. This just heightens the call for more disclosure and transparency so that the investors cannot be taken for a proverbial ride down the tunnel. Stephen Colbert puts this matter in its true terms when he says “Lying to the SEC is not perjury, Wall Street made that into an industry.”
Zain Naeem is the head of equity research at Maan Securities (Pvt) Ltd. He is a Lahore-based commentator with more than 3 years of experience in trading and research at the Karachi Stock Exchange and Lahore Stock Exchange. He enjoys writing and commenting on the finance front and presenting it to various audiences in different forums. Zain is deeply interested in politics, business and finance and is fascinated at how the three intermingle with each other.
The views expressed in this article are the author’s own and do not necessarily reflect Arabian Gazette’s editorial policy.