Gary J. Gross took in more than $700,000 in commissions and fees, while causing investors to lose more than $2.7 million between 2004 and 2006

Gary J. Gross, who worked in the Boca Raton office of broker-dealer Axiom Capital Management, recommended unsuitable securities and engaged in unauthorized and often unsuitable trades in his customers' accounts.It is alleged that Gross took in more than $700,000 in commissions and fees, while causing investors to lose more than $2.7 million between 2004 and 2006.To cover up his misconduct, Gross, who now lives in Far Rockaway, N.Y., allegedly provided some customers with documents reflecting false account values, according to the complaint filed in U.S. District Court for the Southern District of Florida.The SEC is seeking a permanent injunction against Gross, as well as attempting to get back the money he allegedly took along with interest and a fine.

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Posted in: SEC

Raymond Zwego,led a real estate investment company that purchased more than 50 area homes, obtaining more than $19 million in mortgages

Raymond Zwego, 60, led a real estate investment company that purchased more than 50 area homes, obtaining more than $19 million in mortgages by using straw buyers and falsified documents.Chief U.S. District Judge Fernando Gaitan also ordered Zwego to pay almost $5.6 million in restitution.In passing sentence, Gaitan noted that Zwego’s conduct has had a “long range and devastating impact on our community.”
“It’s clear this society has to be protected from a predator like Mr. Zwego,” Gaitan said.Zwego’s scheme collapsed in 2006 when he attempted to purchase a home from former Jackson County Executive Katheryn Shields and her husband, lawyer Philip Cardarella. While the prosecutors charged the couple in the conspiracy, a federal jury subsequently found them not guilty of all charges.Shields and Cardarella, who are Democrats, contended that the charges against them were politically motivated and brought by a Republican-led Justice Department.

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Posted in: Jackson County

Frank L. Amodeo today pleaded guilty to defrauding the federal government out of at least $172 million in payroll taxes.

Frank L. Amodeo today pleaded guilty to defrauding the federal government out of at least $172 million in payroll taxes.He remains free on $500,000 bond, awaiting sentencing.It's not clear when Amodeo will be sentenced, but he faces a maximum of 25 years in prison and fines that could top $360 million.Amodeo is the formerly high-flying entrepreneur who created Mirabilis Ventures Inc., a conglomerate that bought up distressed companies, including those that provided payroll services.According to his plea deal, those subsidiaries collected payroll taxes but never passed them on to the Internal Revenue Service.The federal government sets the amount of fraud at $182 million. Amodeo says he only kept $172 million. The rest, he contends, was legitimately earned fees.Amodeo signed the plea deal yesterday, but U.S. Magistrate Gregory J. Kelly postponed until today a plea hearing.That took place this morning in Orlando federal court.Amodeo appeared, in a blue suit and his electronic monitor. He said he was clear-headed and understood everything that was going on.That's important because he suffers from bipolar disorder, a mental illness. Yesterday one of his psychiatrists testified that although Amodeo is mentally competent to enter the plea, he's still seriously mentally ill and believes that he will, at some point, come to dominate the world economy.Defense attorney Harrison "Butch" Slaughter Jr. said that at times, during his 2 ½ years of working with Amodeo, the defendant has believed he could forecast the future and could telepathically communicate to people.

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Posted in: Mirabilis Ventures Inc.

Oman Ghana Trust Fund now has money nearing THREE TRILLION DOLLARS! That would be enough to rescue AIG and Lehman Brothers

Americans have a saying that there is a sucker born everyday. The statement speaks to the gullibility of some people to fall for schemes that are patently fraudulent, and should be avoided the same way one would avoid the plague. There is an ongoing attempt to scam the government and people of Ghana unless sensible people rise up to say no to con-men peddling falsehoods and lies. The damage will be done not only in terms of huge monetary loss, but our national prestige and international credibility will forever be tarnished, if Ghana were to fall for a scam currently being sold by remnants of John Ackah Blay Miezah’s hustlers.Of late, a group calling itself Friends of Oman Ghana Trust Fund (FOGTF) has embarked on a media blitz aimed at gaining the support of the government and people of Ghana to what is essentially a scam akin to what the villain in our folkore, Kwaku Ananse would endeavour to visit on his family.One cannot begin to understand this fraudulent scheme without reference to the name and fraudulent practices of the ‘master con-man’ Blay-Miezah. Indeed, FOGTF claims to be continuing the efforts ‘made’ by Blay-Miezah to gain access to some so-called money. The mere mention of Blay-Miezah should have rang bells, and alerted officials and the public to the scam, but so far, like Blay-Miezah, the perpetrators are doing their job in a fashion that sounds credible to the gullible. According to Blay-Miezah, Ghana’s first president Dr. Kwame Nkrumah named him the sole beneficiary of millions of dollars that Nkrumah had stashed in banks in Switzerland under a scheme described by Blay-Miezah as the Oman Ghana Trust Fund (OGTF). After Nkrumah’s death in 1972, Blay-Miezah managed to sell his OGTF story to investors in the city of Philadelphia, Pennsylvania, USA. Blay-Miezah had lived in the city, and had spent time in a state prison for writing bad cheques, and failing to settle a huge bill at the Bellevue Stratford Hotel in Philadelphia.After the con game was brought to the attention of authorities, Time magazine (April 21, 1986 edition), did a story on investors who had contributed at least $18 million (and possibly $100 million) to the scheme, and quotes Robert Ellis extensively on the modalities of the criminal enterprise. Robert Ellis had posted bond for Blay-Miezah in a previous criminal case in Philadelphia, and in return Blay-Miezah appointed Ellis, his American ‘agent’. The main role for Ellis was to solicit American investors whose money would then be used to facilitate retrieval of alleged millions of dollars bequeathed to Blay-Miezah under the OGTF by the late president Nkrumah of Ghana. Blay-Miezah insisted that he needed cash in hand (which he personally didn’t have!), in order to cut deals with some local Chiefs and government officials, all of whom had some stake in OGTF, and whose palms must be greased in order to enable him to secure the funds. The story being peddled in Ghana today by FOGTF, is rather similar to the tale woven by Blay-Miezah to successfully ensnare gullible investors in the 1970’s.As Time magazine pointed out, those who fell prey to Blay-Miezah were not some wacky illiterate individuals, but highly intelligent and educated professionals. There is a general belief among westerners that Africa’s leaders especially in the immediate post-independence era were corrupt. Therefore no matter how zany Blay-Miezah’s story sounded, people found it hard to discount. A corrupt African ruler had stolen millions from his country’s treasury and stashed the money in Swiss banks. The story had/has a familiar ring to it. And con-men adopted the story to rake in millions from the gullible and the greedy.By the mid-1980’s when the gullible investors had not received a penny on their contributions, and local law enforcement authorities in Philadelphia had been alerted to Blay-Miezah’s con-game, Blay-Miezah was happily ensconced in a posh mansion in London where he was safely protected under diplomatic immunity.
When Blay Miezah arrived in Ghana during General Acheampong’s military regime (about 1975), he conned the government into believing his story. Mr. Ebenezer M. Debrah who had served as Ghana’s ambassador to the United States, and was quite aware of Blay-Miezah’s machinations, was the secretary to the military government of the National Redemption Council. Reports at the time indicated that Mr. Debrah provided a dossier on the criminal activities of Blay-Miezah and strongly warned the government to stay clear of the man. However, Blay-Miezah’s story had made such an imprint on the Ghanaian psyche, and the man laundered money so much so that, Debrah was seen as an impediment to Ghana receiving a windfall. Mr. Debrah was sacked as Secretary to the government. Blay Miezah’s public relations machine was quite effective, and it included stalwarts in the Nkrumah regime such as the impressive Krobo Edusei and Kwasi Amoako-Attah a former Minister of Finance.With his main antagonist out of the way, Blay-Miezah successfully sold his story to the government and then claimed that he could only retrieve the money if a diplomatic passport was issued to him. In reality, his acquisition of the diplomatic passport provided immunity and cover from outside prosecution. Consequently, when a criminal case pertaining to the fraud was brought against him in the United States of America in the 1980’s, Blay-Miezah could not be extradited to Philadelphia to face charges relating to financial extortion and other crimes. Blay-Miezah’s diplomatic passport would be renewed by the PNDC military government which ruled Ghana from 1981-1992.
Thus, the late Ed Bradley had to go to London to interview Blay-Miezah for the American CBS TV station’s 60 Minutes investigative report. I will never forget Ed Bradley’s interview of Blay-Miezah. The day after the interview, our American classmates who had seen the program looked at me and the other African students in awe. The Americans wondered how the African could come up with such a well-crafted story to outwit these highly educated, professional white Americans?
The master stroke however, was Blay-Miezah’s insistence that the interview with 60 Minutes could not commence unless Bradley provided the best gin for Blay-Miezah to invoke the spirit of his ancestors, by purifying his Stool, the symbol of his traditional authority, and the embodiment of the souls of his ancestors! Bradley looked on rather bemused as Blay-Miezah gargled a mouthful of the liqour and then released powerful sprays 3-times onto the ancestral Stool!
As one elderly Jewish woman who had invested his lifetime savings in the OGTF, and who appeared on the program wondered: How could Blay-Miezah not be rich, and be the beneficiary of such huge largesse when he accommodated the investors in posh most exclusive hotels in London, Geneva, and Paris. Of course, Blay-Miezah could afford exquisite entertainment for his investors because he was using their money!! Blay-Miezah himself did not have a dime to his name by himself. No wonder, Ed Bradley said that of all the con men he had been involved with, Blay-Miezah was "clearly head and shoulders above the rest . . . the best con man I’ve ever seen in my life."
The preceding provides more than a cautionary tale to the government and people of Ghana as a latter-day Blay-Miezah seeks to resurrect a discredited scam that has spawned copy-cat scams all over the world.
When Blay-Miezah concocted his scheme and defrauded the gullible and greedy investors of their hard-earned money, the scheme was largely anonymous. Today, thanks to the Internet and massive participation by Nigerian fraudsters, the scheme is called 419, so-called after the section of Nigeria’s legal code dealing with financial scam. What the FOGTF is claiming is quite similar to a 419. It is a sad commentary on the state of affairs of the body politic when government officials and the media cannot see through the ruse being currently peddled by the so-called FOGTF.
Like Blay-Miezah before him, Gregg Frazier who is currently presented as the ‘sole trustee’ of the Oman Ghana Trust Fund, is reportedly demanding a Ghana diplomatic passport to facilitate retrieval of the money. Like Blay-Miezah before him, Frazier passes himself off as having been anointed sole trustee of OGTF after the death of Blay-Miezah; and Frazier similarly claims to be the only living soul with knowledge of a ‘special security code and password’ needed to redeem the money. Just as Blay Miezah had his American ‘agent’ to do his bidding in the U.S.A.; Frazier has his Ghanaian local front man in the person of one Kobla Asamani who is sometimes addressed as “His Awardship Kobla Asamani” to smoothen his way among the Ghana labyrinth! And like Blay-Miezah, Frazier seeks government assistance in the scheme.
Kobla Asamani who signs press releases of the Friends of Oman Ghana Trust Fund, warns that Frazier is advancing in age, and the government of Ghana should therefore act with alacrity to help Frazier secure the funds else Frazier takes knowledge of the security code and password to the grave! Blay-Miezah’s minions used to give similar ominous warnings!
These two men and their so-called Friends of Oman Ghana Trust Fund have embarked on a media show to press their fraudulent case. They have managed to get Ghana’s Finance Minister Baah Wiredu to signal interest and support for the scheme, according to reports in the Ghana news media currently saturated with news about FOGTF and OGTF. Frazier and his group have managed to meet with the Finance Minister in the latter’s office. We must stop this nonsense before it is too late!!
Blay-Miezah similarly used the media to get his way. He was feted by some of Ghana’s most accomplished businessmen and industrialists, some of whom were too eager to carry his luggage publicly; and offered him sumptuous accommodations. The FOGTF is adopting similar tactics to wine and dine some journalists to do FOGTF’s bidding. I am sure there may be some gullible people in positions of power and influence who may fall prey to the machinations of FOGTF. After all, Gregg Frazier who is an American, understands that there is a sucker born everyday.According to Gregg Frazier and FOGTF, Oman Ghana Trust Fund now has money nearing THREE TRILLION DOLLARS! That would be enough to rescue AIG and Lehman Brothers in the ongoing banking crisis in the U.S.A.!! There is no Oman Ghana Trust Fund. And there is no money anywhere in spite of promises being made by Frazier. Blay Miezah made similar promises, including one that if he did not bring the money he could be shot. This promise came after he was arrested and jailed by the PNDC government of ex-president Rawlings. Blay-Miezah conned people including Gregg Frazier (who claims to have given millions to Blay-Miezah). Sadly, FOGTF is now too late to a game where the most gullible continue to be conned. If Frazier believes otherwise, I am sure he would wish to buy my parcel of virgin forest in the Louisiana swamps in the USA! As an American he would understand the nature of my offer!!! Rather than holding meetings to aid and abet this forgery, I urge the government of Ghana to treat the claims being made by the so-called FOGTF with utmost contempt. The group must be warned in no uncertain terms that continuing this calumny, and using Ghana’s name in such fraudulent and despicable manner could invite serious legal problems for the group and its members.

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Posted in: Ghana

Dennis Raymond Sheffield, who pleaded guilty in June to 6 counts of bank fraud

Dennis Raymond Sheffield, who pleaded guilty in June to 6 counts of bank fraud, also will have to pay back $953,557 he obtained from Robertson Banking Co. in 2001 and 2002. "That's going to be difficult in light of his financial situation currently and other obligations," said defense lawyer Tommy Spina, who unsuccessfully argued for leniency. For the last three years, Sheffield has worked as a salesman for Knight Sign Industries in Tuscaloosa, earning $45,000 a year. Prior to that, Sheffield owned Tall Timber Inc. and had a longstanding relationship with Robertson Banking Co. That is how he was able to get loans in 2001 and 2002 for what turned out to be bogus deals. Sheffield, 47, falsely told the bank that he had a valuable timber sale contract and timber deeds signed by officials of the U.S. Department of Agriculture's Forest Service allowing him to cut and remove trees in the Talladega National Forest in Bibb County. The next year, he falsely told the bank that he had a timber contract with United Land Corp. of Birmingham to remove trees in various parts of Tuscaloosa County. In both cases, according to his written plea document, he went to great lengths to fool the bank, submitting phony maps, contracts, deeds and other documents. He also toured forest land with bank officials. When Robertson Banking officials began asking why the timber was not being cut, Sheffield blamed bad weather conditions and labor shortages.

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Posted in: Robertson Banking Co

credit default swaps market as “ripe for fraud and manipulation”, saying that it was a forum for the shorting of corporate debt without the oversight

$58,000bn credit default swaps market as “ripe for fraud and manipulation”, saying that it was a forum for the shorting of corporate debt without the oversight imposed on cash markets.It was, of course, Congress that chose in 2000 not to extend regulation to OTC derivatives markets, as I noted in my column on Saturday. One of the most influential proponents of not regulating OTC derivatives was Alan Greenspan, then chairman of the Federal Reserve.Mr Greenspan told Congress in 2000 that regulation of the OTC derivatives market was not needed because:“OTC transactions in financial derivatives are not susceptible to - that is, easily influenced by - manipulation.”So then, the OTC derivatives market. Not susceptible to manipulation, or ripe for it? What a difference eight years, and a global financial crisis, make!At the time, Mr Greenspan’s reputation and influence was at its height, and Congress went along with his assessment. I presume that it will now change its mind.

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Posted in: $58,000bn credit default swaps market

Banks may accelerate efforts to move trading in the $62 trillion credit-default swaps market through a central clearinghouse

Banks may accelerate efforts to move trading in the $62 trillion credit-default swaps market through a central clearinghouse or to an exchange after the bankruptcy of Lehman Brothers Holdings Inc. and the credit downgrade of American International Group Inc. Lehman, the first major market-maker to go bankrupt in the decade-long history of the privately negotiated, unregulated business, may leave behind billions of dollars in potential losses for trading partners, according to Barclays Plc of London. No one knows exactly how much because there's no central exchange or system for recording trades. ``The fact that I can't tell you the notional value of derivatives contracts Lehman has written the day after a bankruptcy is a scary thing,'' Brian Yelvington, a strategist at New York-based bond research firm CreditSights Inc., said yesterday. A clearinghouse capitalized by owners could have reduced the risks because it becomes the so-called counterparty, for a fee, to each side of the trade. Now, banks are sifting through trading positions to ``net'' trades that offset each other and reduce potential losses. Untangling that web may last into 2009, said John Jay, a senior analyst at Boston-based Aite Group, a financial services consulting firm. ``Just figuring out what they have could take a week, but the thornier issue is to figure out valuations,'' said Jay. ``It's a Gordian knot because you have different ratings, different counterparties, different end-dates and you have to somehow attach a value to these contracts. It's an operational nightmare and a legal nightmare of interpreting what each contract says.'' The Markit CDX North America Investment Grade Index, which rises as confidence in companies deteriorates, climbed as high as 195 basis points yesterday, from 152 basis points at the close of trading on Sept. 12, according to broker Phoenix Partners Group. The index reached a record 200 during an emergency trading session on Sunday, Sept. 14 as investors tried to prepare for the collapse of New York-based Lehman. A basis point is 0.01 percentage point.
Prices continued to rise in Europe and Asia today after credit ratings on AIG, the biggest U.S. insurer by assets, were cut by Standard & Poor's and Moody's Investors Service. Contracts on the Markit iTraxx Crossover Index of 50 companies in Europe with mostly high-risk, high-yield credit ratings climbed 33.5 basis points to 627.5, according to JPMorgan Chase & Co. prices at 7:19 a.m. in London. The Markit iTraxx Australia Series 9 Index increased 35 basis points to 220 basis points, matching the all-time high of March 17 when Bear Stearns Cos. was bailed out by the Federal Reserve, according to ABN Amro Holding NV. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Each contract is a separate agreement between two so-called counterparties and trades in over-the-counter transactions, leaving parties exposed to the risk that their partner will default.
Barclays analysts estimated in February that if a financial institution that had $2 trillion in credit-default swap trades outstanding were to fail, it might trigger between $36 billion and $47 billion in losses for those that traded with the firm. That doesn't include the market-value losses investors face as the cost to protect companies against a default widens. ``There should be some central agency which prevents risk in the future of a large counterparty failing and causing losses,'' said Puneet Sharma, the head of investment-grade credit strategy at Barclays Capital, the U.K.'s third-biggest bank. ``This was not necessary.'' Wall Street created credit-default swaps more than a decade ago to help banks hedge against loan losses. Dealers later came up with contracts and indexes that allowed investors to speculate on a borrower's creditworthiness without owning any bonds.
The market grew 100-fold in the past seven years leaving dealers, who until a few years ago recorded trades on scraps of paper, struggling to keep up. New York Fed President Timothy Geithner assembled dealers in September 2005 to develop a plan to reduce the backlog of paperwork and unconfirmed trades. In July the 17 dealers agreed to form a clearinghouse, create a system to better manage the collateral that protects trading partners from losses and tear up offsetting contracts to reduce the number of positions that banks have to oversee.
The clearinghouse may fall behind schedule, delaying completion until next year, said a person familiar with the process who asked not to be identified last week because the discussions weren't made public. The development was postponed after the Fed pushed Chicago-based Clearing Corp. to obtain a banking license, which would place it under the central bank's watch, the person said. A spokesman for the Federal Reserve Bank of New York, Andrew Williams, declined to comment. Clearing Corp. spokesman Andy Merrill declined to comment, pointing to a statement last week that the company ``and its clearing participants have been moving aggressively to prepare the CDS platform for launch as soon as the appropriate regulatory approvals are achieved.''
``The industry's progress in building a strong foundation for our business will enable it to successfully address current issues,'' said Eraj Shirvani, chairman of the International Swaps and Derivatives Association and head of European credit at Credit Suisse Group in London, said yesterday in a statement.
Clearing Corp. said it will guarantee trades between dealers, at least at first, and only contracts on benchmark indexes rather than on individual companies.

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Posted in: $62 trillion credit-default swaps market

Counterfeit bank and credit cards used to steal funds from customer accounts.

banks in the UAE have slashed the daily cash withdrawal limit of ATM users by almost half after hackers, who police said were from Russia and Ukraine, used counterfeit bank and credit cards to steal funds from customer accounts.
Some banks even blocked international use of ATM cards as a preventive measure while HSBC Bank temporarily reduced the daily withdrawal limit to Dh6,000 for premier card members and Dh4,000 for others as part of measures to contain the damage.
As thousands of customers thronged ATM machines to change their card PINs (personal identification number) over the past three days, most banks in the UAE said they would continue the state of alert against the fraud, but refused to disclose the size of the money stolen or how many accounts were skimmed.An initial investigation by banks indicated that cash machines were rigged with devices that stole customers’ PINs as they made withdrawals. Jonathan Campbell James, regional head of security and fraud risk, HSBC Middle East, said his bank did not implement a general blocking of overseas transactions as its customers expected to have access to their accounts wherever they travel.“But when we detect a series of fraudulent transactions coming from a particular geography, we may temporarily restrict access,” he said Major-General Khamis Matar Al Mazeina, Deputy Commander-in-Chief of Dubai Police, said the hackers are from Russiaand Ukraine. Banking sources, however, said the hackers were part of an international network, with most of the fraudulent transactions originating from more than 20 countries outside the UAE.Al Mazeina said the police were trying to find out the methods used by the gang to steal from bank accounts. “We want to find out whether the breach occurred when customers used their cards to buy on-line or when they used their cards within the UAE and certain other countries.”He said police still did not have any clue about the number of people and banks hit by the fraud or the total amount stolen by the gang.“We are in touch with credit card companies, banks and fraud victims although we have not received any complaint so far.” He said the police would meet concerned authorities to probe into the matter and find measures to protect credit card users.Banks said only ATM debit cards have been counterfeited. “The attack is more sophisticated than that are routinely experienced, and has come from multiple countries,” Campbell James said.
Most banks continued to encourage customers to change their PIN numbers. “Because a large number of customers have already done so, a significant number of attempts by fraudsters to steal from customers’ accounts have been frustrated,” the bank official said. “HSBC and several banks in the UAE have identified fraud that appears to result from the compromise of ATM information from another bank.
This information has been used to produce counterfeit cards that have been used internationally.”The bank official said if a customer’s card had been copied and used to steal money, the bank would contact the customer, advise them what had been done, organise a refund and issue a new card free of charge.
“Our special accelerated procedure for refunding UAE customers affected by this particular fraudulent attack is working well. A substantial number of customers have already received their refunds and the process of issuing free replacements for cards which have been compromised is on track.”

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Posted in: HBOS

The Lehman collapse has changed the game of how regulators now deal with financial institutions, and potential bailouts are no longer an option.

Bankruptcy of Lehman Brothers has far more serious implications for the world’s financial system, with possible consequences to the Gulf, than did the demise of Bear Stearns. The Lehman collapse has changed the game of how regulators now deal with financial institutions, and potential bailouts are no longer an option.
The accelerated momentum of securitisation of mortgage loans in 2005 caused the subprime crisis, not the low interest rates when the Fed reduced Fed funds to 1 per cent. The sale of securities from credit pools had never reached such a level before. When US investment banks discovered the appetite of foreign institutions, commercial banks sped up their loans to uninformed borrowers to meet the soaring investor demand.
Banks transferred to their trading books what cost too much on their credit books (8 per cent of their assets in equity) even though the so-called “securities” were for the most part illiquid private placements. This trend to structure credit in the cheapest way possible by avoiding capital requirements was blatant regulatory arbitrage on a massive scale. But this was caused by the central banks themselves who insisted on a higher and costly capitalisation on banks, who in turn tried to minimise such costs by moving assets off-balance sheet.
Second, the investor demand for this structured paper was not triggered by the “excess liquidity” created in the low interest rates since 2001, but it instead represented the most massive transfer of wealth ever recorded in history. Two billion individuals moved in a matter of only a few years from a state-controlled economy to semi-capitalist private systems, and the productivity gains across both western economies and emerging market economies unleashed a virtual flood of financial wealth and savings, with the world capital stock nearly trebling from US$60 trillion (Dh220.4trn) to $160trn. One only has to observe these phenomena in the Gulf over the past few years to see the effect on new wealth creation for many classes of citizens.
These same citizens must now be wondering what happens next and the news is not looking good, given the inter-linkages of counter obligations among financial institutions. It will take months to unwind Lehman’s complex deals and obligations with other banks, and given the company’s high-profile presence in the Gulf, it would be a brave soul to state that Gulf institutions will not be affected this time around. Tighter credit and higher margins will be the order of the day as banks seek quality clients, and investors, in turn, seek quality financial institutions whose numbers seem to diminish by the day.
Until the collapse of Lehman, the assumption had been that any financial institution operating at the centre of the international financial system, be it a commercial or investment bank, is simply too big and too interconnected to be allowed to fail or to be wound down quickly for fear of a systemic breakdown. This assumption has now been shaken.This raises the issue of fiduciary risk. Two thirds of the capital flows today go through fiduciaries, those who act as managers, custodians, broker-dealers, administrators or trustees, while credit banks, the dominating power of finance until the 1980s, have become marginalised. The whole texture of finance shifted from a classic loan industry to one of securities trading, warehousing, arbitrage and valuation. Institutions don’t lend cash anymore: they lend securities and exchange credit swaps and interest rates.The shift was so sudden and reached so deeply in a structural sense that it heightened the fragility of the whole system. No wonder regulatory tools based on a credit model have proven to be so ineffective. As long as the industry was dominated by credit and an obligation to generate and protect the “results”, one could reinforce the walls and limits of a regulated system. But when the industry is overtaken by institutions acting as fiduciaries rather than creditors, the obligation is only of the “means” (ie “best practice”) not of the ends, or the result of their imprudence, so how do you effectively regulate that? What is worrying is that more and more Gulf institutions have been following the fiduciary route with traditional credit-related commercial banking taking a secondary role.A move to enlarge the supervisory role of a central bank is likely to create an unprecedented concentration of powers with no corresponding real and effective means to intervene and contain market excesses save for “bailing out” creditors who make the asset bubbles possible. What’s more, by guaranteeing impaired assets, central banks are exposed to capital losses, however over-collateralised the central bank is in its term lending through its new liquidity facilities. As the current crisis itself has shown, when all the financial institutions – rather than just one or two in trouble – face funding risks at the same time, there is not much value in the collateral you are holding unless you can hold it for a long, long time. This is what made Barclays decide to pull out of the Lehman rescue effort.
The Lehman collapse raises the question whether central banks could go under in the wake of their market intervention during a financial crisis. The Fed’s total equity stands at $40 billion versus the $29bn needed to guarantee Bear Stearns alone, and this is without Freddie Mac and Fannie Mae support. A central bank can never go “broke” per se, of course, since a government will always replenish its capital base if the losses due occur. But that would also entail, in effect, printing money at a time when inflation is an issue. Concerning Lehman, the Fed has declined to pump in money to bail it out and some, including Alan Greenspan, are now calling for a new model of financial supervision that does not automatically bail out failed banks. Some have put forward drastic solutions given the potential capital adequacy problems of central banks to support a total collapse in the financial system.
One suggestion is that we need to limit the size of financial institutions. We should limit their size instead of facing the unavoidable option of having to save them. In short, once an institution grows too big, it should be split as AT&T once was in the late 1970s, and IT companies in this century. The argument was one of the social and economic needs to break a cartel, whereas today it is the size itself that becomes so unmanageable relative to the means of containing a systemic risk.
In both cases, the goal is to improve market efficiency. Should we move back to restore the strict division between commercial and investment banking and put an end to such a massive regulatory leakage? The answer may lie in the transition of the industry itself. The “old” Fed had regulatory responsibilities over a traditional commercial banking industry that is mostly a relic from textbooks, while the “new” Fed must consider the financial industry in whole. It is possible that the new regulatory fabric that arises will produce clear lines of responsibilities, dividing the new credit and fiduciary roles within the finance industry, as both sides are not subjected to the same performance obligations.
Given the explosion of commercial and investment banking in the Gulf, this issue will also be an important one for GCC regulators. The trend in the region was for larger banks and mergers to face the big boys from outside. This will cause the same dilemma for Gulf regulators in case one major financial institution faces trouble, but given the state of fragility of banking confidence due to recent fraud and scandals the likely option in the Gulf is to discreetly bail out. In the final analysis, let us hope that in trying to fix this current mess, the regulators do not lay the seeds of a future financial meltdown.

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Posted in: future financial meltdown