“George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.

One prominent financial figure, however, has long thought otherwise... For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street…

A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly ”

The paradox is that though he didn’t support regulating OTC derivatives market, he was quite happy with the system of central banking that involves:

(1)  Government defining what it money (i.e. currency notes), hence outlawing private money

(2)  Government determination of interest rate - individual's time preference fades away

"The great difference between an ordinary casino which you can go into or stay away from, and the global casino of high finance, is that in the latter we are all involuntarily engaged in the day's play. A currency change can halve the value of a farmer's crop before he harvests it, or drive an exporter out of business. A rise in interest rates can fatally inflate the costs of holding stocks for the shop-keeper. A takeover dictated by financial considerations can rob the factory worker of his job. From school-leavers to pensioners, what goes on in the casino in the office blocks of the big financial centres is apt to have sudden, unpredictable and unavoidable consequences for individual lives. The financial casino has everyone playing the game of Snakes and Ladders."

Since the 1980's, in the name of the so-called "free market", governments around the world have made it easier for high-rollers to play in the global casino of high finance. In doing so they have argued that they are respecting the fundamental human 'right' to make millions, and they have claimed that the market is a force for innovation.

What we clearly understand is that there is always a trade-off between different peoples' rights. As Susan Strange implies, the 'right' of certain people to play at the casino can severely impact the right of other people to eat, to afford healthcare, or to send their children to school.

There is a need to evaluate the relative importance of different people's rights. If politics were healthy this evaluation would be performed on the basis of whose 'right' is more fundamental, and clearly the rights of those who wish to eat, study and get well should be considered more fundamental than the rights of those who wish to become multi-millionaires through unproductive speculation.

Unfortunately the political systems of the western democracies are not healthy. They are plagued by lobby groups representing 'special interests', including the financial industry which has put all of our futures in peril. They will seek to preserve their right to gamble, jeopardizing the rest of the world's right to produce, plan, save, etc. We need to use the democratic tools at our disposal to prevent this.

The argument that deregulated financial markets are a force for innovation has been shown to be false. Their only 'innovation' is the creation of ever more complex financial products and derivatives, which even those who buy them fail to understand. Actual innovation, in terms of the productive 'real' economy, is severely stunted by these inveterate gamblers.

A board game, a computer game well no its the way the UK's major industry - financial services - is run.

Just when you think the Cameroons are doing something for the country as a whole you find that there is a catch.

It is a fact that pension funds have been under attack for years whther the are those belonging to individuals that come under attack from unscrupulous sellers or the company funds that find they've been 'borrowed' by the company. At this time the problem is the falling price of the shares. That has caused a problem for those reaching an age when they decide to move their savings into an annuity, and where the money in put into safer bonds. The friendly Conservatives have raised the alarm for those pensioners who have left it late to make the changeover and when the stockmarket is at its lowest for a number of years.

The Conservatives have approached to Government and asked that something be done, a very laudable and worthy approach until it is realsed that that the people they are concerned about are a very wealthy elite who have held onto their money for as long as possible in order to make as much interest as possible. The government should tell the Conservative politicians to tell their friends the homily that is passed to every investor - shares go down as well as up!

Quick quiz, how many of you believe that one of the disadvantages of renting is you throw your money away? Common answer is "absolutely".  Correct answer is "it depends".  For a full analysis see this article.  To do the actual math see this rent vs. buy calculator,

The problem is that for all the proposed solutions to the current financial crisis ABSOLUTELY NO ONE is talking about consumer education.  Its all about protecting the consumer with regulations as opposed to education.  Well whatever your political view on regulation/deregulation (BTW its not about more or less regulation its about the right type of regulation) I can absolutely guarantee you that it WILL NOT prevent the next financial scandal no matter what we do now.  The crooks/financial geniuses/snake-oil salesmen will ALWAYS be ahead of the regulation and if the population is not educated we will have the next crisis (circa 2018-2021).

Want proof look at the previous bubble. Like this one it was driven by the same old mechanisms including good old fashion lying, cheating and, of course, greed (banker, business and, yes, individual).  That bubble was based on tech stocks in which easy money was available, valuation estimates were, uhm, inflated and the common consumer could easily invest over his/her head (sound familiar?).  The result of that collapse was more regulation like Sarbanes-Oxley and other accounting rules but not so much in the way of education.  PHEW, now everyone would be safe...

Now its almost 9 years later and everyone was protected...from another tech stock bubble.  But wait, didn't Joe Six-Pack as well as the economy just get screwed (and screw themselves) again with an entirely different asset class?  Yup, but his time it was housing. 

So, in short, wherever you stand on regulation (pro or anti) it won't be sufficient to protect you in the future.  You need to complement that with education so you can spot the too good to be true offers.  Just ask Greg Brady in The Brady Bunch episode "Wheeler Dealer" (Season 3, Episode 4) in which he buys a $100 car that, OMG, turns out to be a lemon.  Mike Brady is there with the fatherly advice "Caveat Emptor".  Don't know what it means?  Look it up it will be good exercise in doing research.

So get smart and get prepared because the wolves, while being hunted now, will be back (in new sheep's clothing) and no amount of regulation can completely protect you.

WASHINGTON (AFP) - The US government plans to invest directly in US banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said Friday, expanding the focus of the government's 700-billion-dollar rescue plan.

"We're going to do it as soon as we can do it and do it effectively," Paulson said when asked about an equity-buying plan.

"There's no doubt in our mind, given the magnitude of the issue ... that we can use the taxpayers' money more effectively and efficiently ... if we develop a standardized program for making, encouraging equity participation," he added.

A 700-billion-dollar US government rescue plan approved last week had initially focused on the problem of liquidity for banks by offering to buy up their toxic assets.

Paulson's comments demonstrate how the Treasury, after initially resisting the idea, now recognizes the need and attraction of direct investments in struggling banks which are unable to raise new capital from private investors.

Analysts and officials say there is a precedent for the US government buying equity in the Reconstruction Finance Corporation created during the Great Depression when thousands of banks failed.

The rescue plan, called the Troubled Asset Relief Program (TARP), has so far failed to calm investors or restore confidence in the financial system. The leading indices for the US stock market tumbled 18 percent over the week.

Implementation is taking time because of the complexity of the problems, but Paulson said officials were "working around the clock to deal with this."

The secretary of state has warned that the first purchases of toxic assets could take several weeks and he gave no timetable for the equity purchase program. He also declined to comment on the amount of money that would be spent on buying toxic assets compared with equity.

"I'm not prepared to say today about the relative sizes," he said.

On Wednesday, the British government unveiled a plan that would make 50 billion pounds (64 billion euros, 87 billion dollars) of taxpayers' money available to buy shares in the country's banks, leading some to speculate that the US would follow suit.

Under a five-point G7 "action plan" announced Friday, leading economic powers would seek to ensure that banks "can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses."

Paulson said that efforts to fight the financial crisis would be in cooperation with the G7 and said any government stock purchase would be in non-voting shares.

One of the concerns about public stakes in banks is the influence the government would be able to exert on company management as a shareholder. Non-voting shares largely mitigate this risk.

US investment bank Morgan Stanley (MS) has become a leading candidate for a state capital injection.

Shares in the group, one of only two independent investment banks left on Wall Street, have collapsed in the last week.

The future of the bank had looked secure after Japanese peer Mitsubishi UFJ Financial Group (MTU) said it would buy nearly a quarter of the company for 9.0 billion dollars, but there is speculation that the deal might fail or be renegotiated.

"As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardized program that is open to a broad array of financial institutions," Paulson said in a statement.

"Such a program would be designed to encourage the raising of new private capital to complement public capital."

The government’s approach to the crisis appears to about the same as Bush’s approach to Iraq: when your strategy is failing, double down.

This only makes sense if he can say government regulation and interventions have contributed to the crisis.  He handwaves at Fannie Mae and Freddie Mac, but there's no argument.  In any case, the subprime mortgages at the heart of the mess were the ones that the two corporations couldn't touch.  It seems that their failing was not directly influenced by their status as GSEs.  

There are no shortcuts.  Whether you're in favor of new regulations or against them, you have to argue your case on the merits, not vague claims about the market being under or over regulated.

I was ten years old when the stock market crashed in 1987 and I remember watching TV with my family as it was dubbed Black Monday, one of the worst days in the history of the stock market. The market eventually recovered a few years down the line but the memory stuck with me.

As I got older and started investing in the late 90's, I wondered, "When will the next crash be?  Will it be as long as the time between the last major crashes in 1929 and 1987?"  This month we found out the answer.  Only this time, it feels like a bad dream where each successive cold sweat is followed by another bad dream.  Every day wears on and the market goes down further.  Its a slow, painful, agonizing nosedive.

I've never really understood how some market mechanisms work until this month's crash, and even now I don't really understand it.  In a nutshell, because of bad investments by large banks in mortgage backed securities, the banks stopped lending so they could meet their debt obligations, and the credit markets froze up.  Apparently, it's really difficult to get a loan right now.  Even for cars.

How could this have happenned?  Why did we let it happen?  When will this bad dream end?

From 1987 to 2006, when the Chairman of the Federal Reserve, Alan Greenspan raised interest rates, stocks would go down, and when he lowered interest rates, stocks would go up.  He was revered by many as the smartest financial mind alive.  CEOs, traders, and businesses would hang on his every word and try to decipher his periodic statements on the economy.

I eventually would do the same as an investor when I learned of his ability to control my investments in tech startups during the late 90's with his interest rate wand waving.  Some referred to him as The Oracle, but to me, he was The Wizard.

The Wizard was the consummate proponent of the free market and especially the area of derivatives.  According to the NYTimes article, derivatives are financial instruments that "derive" their value from underlying assets and can be used to limit your risk in those assets.  Because of this reason, The Wizard didn't want any regulations around derivatives.  Over time, the investments became too complicated and intertwined that even the smartest people in finance now are having a difficult time trying to figure out how all of this will play out.

The NYTimes quotes The Wizard:

“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.

“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”

No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets.

“Governments and central banks,” he wrote, “could not have altered the course of the boom.”

I can certainly respect a person that stands behind his/her beliefs when things don't go according to plan.  (There seems to be a lot of that going around these days, doesn't it?)  But to be a proponent for deregulation and then blame it on the players seems unfair.

Changing course is an option and it always should be.  I'm not saying that we need everything regulated, but we should learn from it and put some stops in place.  If there is anything we have learned in the last decade, it's that living on the polar extremes is not the answer.  We live in the 21st century and information travels further and faster.  It's why the markets have given us whiplash this month.  Every point of view has to be heard and making the most intelligent decisions through collaboration has to be the method of significant policy creation.

Only time will tell how The New Wizards, Ben Bernanke and Hank Paulson, will work out for us in the long run.  Even if these Wizards can wake us up from the bad dream, there's no guarantee that we won't turn into pumpkins.

WASHINGTON — The Internal Revenue Service today released a notice designed to help eligible homeowners who received federal reimbursement grants stemming from Hurricanes Katrina, Rita or Wilma take advantage of a new tax provision.

Notice 2008-95 provides guidelines to homeowners who received these grants, including the Louisiana Road Home Grants and the Mississippi Development Authority Hurricane Katrina Homeowner Grants.

The Housing and Economic Recovery Act, enacted this summer, included the new provision, aimed at helping grant recipients who previously claimed hurricane-related disaster-loss deductions on their main home. The new law gives affected homeowners the option of adjusting previously claimed deductions by treating their federal reimbursement grants as reimbursement for the losses they suffered on their main home from Hurricanes Katrina, Rita or Wilma.

Before this change, homeowners who claimed casualty loss deductions and received grants in a later tax year as reimbursement for the loss were required by law to pay tax on part or all of the grant to compensate for the tax benefit of the prior deduction. While individual circumstances varied, this meant that some taxpayers ended up paying more tax on the grant than they saved by claiming the deduction.

The notice explains how eligible taxpayers can amend prior-year returns to reduce the casualty loss deduction by the amount of the grant, and explains that taxpayers have one year to pay back any resulting tax due, penalty-free and interest-free. To qualify for this relief, these amended returns must be filed by July 30, 2009, and the entire resulting tax due paid by July 30, 2010, in most cases. The notice also provides special instructions for those taxpayers who have already filed an amended return.

Taxpayers should write the words, “Hurricane Grant Relief” in dark, bold letters at the top of their amended return, Form 1040X, and mail it to: Internal Revenue Service Center, Austin , TX 73301-0255 . Amended returns cannot be filed electronically.

The IRS cautioned that, although filing an amended return may be a good option for many, it won’t necessarily be the right choice for everyone. The agency urges affected taxpayers and their representatives to consider carefully which option is best under their particular circumstances.

"The refinery is in the city's cross hairs because it's one of the nation's largest emitters of benzene...  What's more, it yields more emissions of the toxic chemical per barrel of product than other refineries across the nation.  'If the company believes that it's just fine to put tons and tons of benzene in the air,' [Mayor] White said in an interview, 'then we would like to hear what scientific evidence they have that benzene is good for you.'"

In "Mayor takes on giant refinery," Tresaugue writes:

"[Mayor] White said the he is hopeful that the  hearing would lead state regulators to establish an acceptable limit for benzene.  Texas doesn't have one, but other states have set such standards.  White also wants the TCEQ to require monitoring of emissions at the plant's fence line with public disclosure as a condition of every permit.   ...the city raised doubts about the accuracy of industry's emissions estimates, saying that direct measurements showed significant discrepancies."

In a follow-up editorial, the Houston Chronicle's editors wrote:

"After years of negotiations to lower the level of toxic emissions by industrial facilities here, Houston Mayor Bill White has seized on a rare opportunity to try to force Lyondell Chemical to defend in court emissions of the carcinogen benzene from its refinery along the Houston Ship Channel.  In nearly three terms in office, the mayor has searched for ways to force industries that produce toxic emissions to accurately report the discharges and utilize new technologies to reduce them."

"The mayor and his staff deserve credit for taking a tough line against air pollution and for exploring every avenue possible to force industry and state and federal regulators to recognize that current emission standards are inadequate to protect our citizens."

Readers of The Pump Handle may recognize the Houston Lyondell Chemical refinery as the site of the 30-story crane collapse on July 18 at which four workers--Marion "Scooter" Hubert Odom III, 41, of Highlands; John D. Henry, 33, of Dayton; Daniel "DJ" Lee Johnson, 30, of Dayton; and Rocky Dale Strength, 30, of Santa Fe, Texas---where killed.  The men had been employed by Deep South Crane and Rigging.  Seven other workers were injured in the collapse.  (More on this crane disaster.)  Federal OSHA is investigating the incident and if violations of safety and health standards are identified, the citations and monetary penalties will be issued before January 18, 2009.

(1) Two government-sponsored enterprises, Fannie Mae & Freddie Mac, bought mortgages from banks, eliminating the risk to banks of lending to people with poor credit and inadequate down payments.

(2) An implicit guarantee by the government that it would bail out the FMs (make up your own obscene alternative meaning for the initials), allowed them to borrow at extremely low rates and profit from accumulating TRILLIONS of dollars of debt to acquire mortgages: they were able to borrow amounts equal to FORTY TIMES their net worth.

(3) FDIC insurance has caused depositors to pay no attention to the soundness of the banks where they keep their money. Thus, prudent behavior by banks not only isn't rewarded, but is actively discouraged, as they make more money by taking on risk and don't need to fear a loss of confidence when they engage in irresponsible behavior.

(4) Having a central bank (the Fed) with the power to create money in unlimited quantities creates a false sense of security throughout the banking industry, one which will last until a hyperinflation that destroys the buying power of those dollars makes it clear that the government can't create wealth just by printing it.

The bottom line is that past government interventions have destroyed the regulatory nature of markets, and the current proposed ones only make it worse.  We SHOULD regulate bankers and punish bad behavior.  By ENDING government intervention.

Charles Niemeier, member of PCAOB

It has now been 30 days since Mr. Niemeier's really big splash.  The New York State Society of CPAs sponsors an annual conference featuring speakers from the Public Company Accounting Oversight Board (PCAOB).  On September 10, 2008, outgoing PCAOB member Charles Niemeier assailed the Securities and Exchange Commission (SEC) push to replace U.S. generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS).  In his strongest public comments (pdf version) to-date, Niemeier came out strongly in favor of retaining U.S. GAAP.  Two public accounts of his remarks quickly became available, along with two commentaries:

• CFO.com  Regulator Rips Into Global Accounting Plan by Marie Leone
• Reuters:  Regulator Pans U.S. Move Toward IFRS Accounting by Emily Chasan.
• The Summa:  Take This, Mr. Cox! by David Albrecht.
• NYTImes:  The Rush to International Accounting by Floyd Norris

Before analyzing his speech, I'll say a few words about his background.  Niemeier's brief biography is posted at the PCAOB website (but it may be removed after his term ends at the PCAOB in the next few days).  It reads:

Charles D. Niemeier was named a member of the Public Company Accounting Oversight Board in October 2002, and served as acting chairman of the Board from January to June 2003.  Prior to being appointed to the Board, Mr. Niemeier was the Chief Accountant in the Division of Enforcement of the U.S. Securities and Exchange Commission and co-chair of the Commission's Financial Fraud Task Force.  Earlier, he was a partner in the Washington, DC, law firm of Williams & Connolly LLP, where he worked for 11 years.  Prior to joining Williams & Connolly, he was a practicing certified public accountant for 10 years.   Mr. Niemeier received his JD from Georgetown University Law Center and his BBA from Baylor University in Waco, TX.

What the PCAOB biography does not say is that Mr. Niemeier possesses one of the few great minds in accounting practice and regulation.  There are not that many great minds in accounting (or anywhere else for that matter), and the majority tend to proceed into academe where they can deal with accounting issues at the highest level of theory and abstraction.  In my opinion, the other greatest minds to have worked recently in regulation are Dennis Beresford, James Leisenring and Lynn Turner.  All have left their stamp on American accounting.

Mr. Niemeier's two defining characteristics have been to work for the protection of the American investor and to support tight regulation of the financial markets.  He believes the U.S. markets to be substantially unique from Europe's because American investors heavily rely upon them for retirement savings.  In Europe, pensions are supplied by government.  Consequently, U.S. investors have much more at stake (from a personal sense) and have a pressing need to make sure that investments are as riskless as possible.  When financial market participants in the U.S. do not comply with legal and regulatory rules, investor livelihood is threatened.  This is not as true in Europe, where the focus is on wealth accumulation.  Consequently, he approaches his work in market regulation as a sacred trust.

Charles Niemeier has long recognized the information asymmetry possessed by corporate executives when it comes time to report company progress to investors in the financial markets, and their tireless obsession to work on their own behalf instead of on the behalf of investors.  Consequently, he has been a leading proponent of tight regulation of the financial markets, without it the system can't work as intended.  He sincerely believes in (1) the Sarbanes-Oxley Act of 2002, (2) a strong, independent PCAOB and (3) the high-minded mission of strengthening the auditing profession so that it can force corporate management to comply with securities laws and accounting rules.  He believes that only through full and honest disclosure can investors be protected in the feral world of securities markets.  He says in his keynote speech, "We have the lowest cost of capital, because we have the strongest system of investor protection in the world."

In the three years of the Christopher Cox era at the SEC, things have changed in the world of regulation.  Mr. Cox is not so inclined toward strong, tight regulation of the securities markets as Mr. Niemeier would like (see Ed Ketz's editorial on The Accounting Cycle, A Pox on Christopher Cox, for more on Cox and regulation).  Moreover, Mr. Cox seemingly has placed PCAOB independence (from auditing firm and corporate lobbying) at risk (for more on this see the excellent blog post on August 25, 2008 by Floyd Norris of the New York Times, Is the Accounting Oversight Board Really Independent? where he implies that the PCAOB's independence certainly is threatened by Christopher Cox).

Finally, Mr. Niemeier believes that if the U.S. moves to IFRS, then investors will suffer because of certain factors that will mitigate the effectiveness of auditors.

Now, let's get on to what Charles Niemeier actually said (pdf version) on  September 10, 2008.  As I explain in the conclusion to this article, Charles Niemeier's speech could be as important to the 21st century American financial market system as was Thomas's Paine's Common Sense to the American Revolution.

To Niemeier's way of thinking, everything revolves around the central issue of how tightly financial markets should be regulated.  The opposing sides believe that either (1) t regulation is too tight and counterproductive in the U.S., or (2) recent failures show that the system of regulation still needs to be improved.  Clearly belonging with the second side, Mr. Niemeier sends a message to Mr. Cox:

One would think talk of over-regulation would have been silenced.  Not so. Some corners of Washington continue to pursue initiatives rooted in contentions that U.S. securities regulation was causing managers to shun U.S. markets in favor of more lightly regulated ones elsewhere.  To my mind, those initiatives are misguided and could weaken the competitiveness of our markets. [italics supplied by me]

Mr. Niemeier's speech is a focused rebuttal of three "misguided initiatives":

1. Switching to international accounting standards, proposed by SEC.
2. Reliance on non-U.S. regimes for auditor oversight, proposed by PCAOB.
3. Converging U.S. auditing standards to those developed by the International Federation of Accountants, discussed by PCAOB.

Misguided Initiative #1--Switching to IFRS

Charles Niemier says that IFRS are not likely to produce benefits for either U.S. investors or the U.S. economy, and that a better alternative exists.  He puts forth five clear reasons for why IFRS won't benefit U.S. investors.

First, responding to Cox's claim that switching to IFRS will contribute to a convergence of the the best parts of both IFRS and GAAP, Niemeier says plans to switch to IFRS will undermine efforts to converge U.S. GAAP and IFRS.  Rather, it is about pitching GAAP in the trash can and adopting a weaker IFRS.

Perhaps the most candid explanation for the new approach was provided by FASB Chairman Bob Herz, who said recently,  “We do have the best reporting system, but the rest of the world will not accept it.”  The truth is that the new approach is not about convergence, but about capitulation.  It’s an exit strategy. It’s not a way of gaining comparability, but a way of getting away from GAAP.  It does not address the real challenges we face.  And therefore it’s not going to take us where we need to go to achieve comparability in financial reporting.

It seems to me as if Niemeier has really hit the nail squarely on the head.  Truer words have rarely, if ever, been spoken.  The IASB has no incentive to work with the SEC.  Moreover, SEC arrogance creates unnecessary resistance to good U.S. ideas.  There is little point to burning bridges before you even approach the river crossing.

Second, responding to Cox’s claim that IFRS are superior to GAAP because they are principle based, Niemeier says both are about equally principle-based.  The difference lies in the detailed guidance contained in the rules.  It is the lack of detail that will lead many corporate executives to perceive that they can present a rosier picture than justified.  Niemeier reasons that this could come back to haunt those executives when they are taken to court.  I agree that U.S. GAAP is based on principles as enunciated in the Conceptual framework.  I also agree using IFRS will tempt execs to paint that rosier picture  I'm unsure about the legal implications.

Third, responding to Cox's claim that switching to IFRS will enhance comparability of financial reports, Niemeier says no, it will not.  One must realize that many countries adopt IFRS but still cling to local treatments or exceptions.  In addition, if IFRS are crafted to permit more flexibility, then it stands to reason that comparability will not occur.

This is where the two objectives I discussed at the outset – comparability for investors and flexibility for managers – conflict.  Calls for U.S. regulators to acknowledge that IFRS are not designed to achieve comparability have already begun.  For example, the AICPA has said that “a decision by the SEC to permit an IFRS option should carry with it an expectation by regulators and investors that the use of reasoned, professional judgment may yield different outcomes in similar circumstances more often under IFRS than U.S. GAAP.   Comparability is also affected by cultural differences.  There is nothing unique about IFRS that addresses these differences to make reporting more comparable. Research by Ray Ball of the University of Chicago and others has explored the connection between standards and comparability of reporting in depth.  In their words, claiming that uniform standards produce comparable results is “substantially and misleadingly incomplete, because financial reporting practice under a given set of standards is sensitive to the incentives of the managers and auditors responsible for financial statement preparation.”

Niemeier than makes his strongest comment, "If IFRS are not going to deliver comparability, then claims that GAAP is obsolete are misplaced as well."  Niemeier again squarely hits the nail on the head.  I believe this to be the single greatest reason against switching to IFRS.  It simply has no chance of realizing its greatest advantage.  If it is impossible to realize advantage from IFRS, then the U.S. should not makethe seitch.  I argue that U.S. will lose the ability to compare financials among U.S. companies, which will lower their returns and cost them trillions.

Fourth, Niemeier responds to Cox's claim that IFRS will strengthen investor protection by saying that it won't in the U.S.  Allowing corporate executive more flexibility as they prepare financial statements will only make it more difficulty to evaluate the appropriateness of their disclosures, which means that enforceability becomes more difficult.  I agree.  U.S. executives have a very long record of hiding their tracks as they circumvent the rules.  At least form was enforceable if substance wasn't.  Now, corporate executives will have carte blanche to paint any picture they so choose, and regulators will have a devil of a time in trying to figure out what the executives are up to.

Fifth, Niemeier says IFRS are more at risk from lobbying and other political pressure than GAAP, not less.  I agree, and even Cox admits this in the proposed road map.

Niemeier then suggests an alternative to Cox's policy of moving to IFRS.  Neimeier's alternative includes these points.

1. "… we should stop pursuing an agenda of enhancing management discretion and instead write accounting standards in a manner that fosters, indeed requires, comparability."
2. "Whoever sets the standards should be independently funded."  Moreover, "…we need to go beyond funding, and focus on adopting and sticking to national policies of protecting the standards-setter … from influences unrelated to the quality of its standards."
3. "We should return to a policy of convergence, not planned capitulation. The focus should be on quality, not speed.  …GAAP and IFRS should be virtually identical."
4. "The best way to combat bad incentives is to create a stronger counter-incentive by enforcing the standards. We need to acknowledge that enforcement is the reason for the benefits that companies get from a U.S. listing, not a detractor to the supremacy of U.S. markets."

Misguided Initiative #2

Relying on others for international auditor oversight

Mr. Niemeier's comments on this topic are brief and to the point.  First, he says Sarbanes-Oxley gives the SEC and PCAOB better tools for regulating foreign audit firms than regulators in other countries currently possess.  Second, he says that the PCAOB December 2007 proposal (that it rely upon qualifying oversight bodies in other countries to inspect their own auditors) is a bad idea.

I am concerned that some countries may have established oversight bodies not so much for their own purposes, such as to strengthen investor protection locally, but rather to persuade the PCAOB not to conduct inspections directly. … research shows that variation in local enforcement intensity can dramatically affect reporting quality. Yet the proposal would effectively balkanize inspections of audits, undermining a key mechanism to enforce consistency and quality in reporting.

I agree with Mr. Niemeier here.  I have long felt this way (see Why IFRS Won't Work in the United States. Moreover, he has so clearly hit the nail on the head that nail head is now indistinguishable from the wood's surface.

Misguided Initiative #3

Converging U.S. and International Auditing Standards

In this section of his speech, Mr. Niemeier refers to a ongoing consideration by the PCAOB of another initiative:  Converging U.S. auditing standards to those developed by the International Federation of Accountants.

Niemeier is against this because the auditing standards created by the IFA are not designed to be used for regulatory purposes.  He believes that if the U.S. were to adbdicate its current responsibility to create auditing standards, it would be tantamount to permitting the auditing profession to create its own standards.  This, he believes will weak the regulation of auditing firms, and this will weaken protection of U.S. investor interests.

Conclusion

Charles Niemeier's speech is a masterpiece, in my opinion.  It should be required reading by all students of accounting, the entire body of professional accountants in the U.S., presidential candidates John McCain and Barack Obama, and as many investors as possible that make up their own mind sometimes instead of relying wholly upon specialists for their investment strategies.

The first reason that this speech is so worthwhile is that it places the IFRS debate in its proper position in the grand scheme of securities regulation in the United States.  The IFRS question is all about two paradigms that are (as all paradigms inevitably are) mutually exclusive.  Either less regulation is better, or more regulation is better.  In this issue it is impossible to both have cake and eat it too.   That Mr. Niemeier chose to frame the debate in this context speaks volumes about the quality of his mind.

The second reason why this speech is so worthwhile is that a major regulator has come out against trashing GAAP and adopting IFRS.  There seems to be considerable discontent amongst the common folk of the accounting world.  The decision to move to IFRS was made at the highest level and without consulting with us.  Consequently, the common folk have largely adopted a fatalistic perspective on it.  It is not cost effective to voice dissent, because the issue is perceived as a done deal.  That such a prominent official as Charles Niemeier has come out against it has instantly put the IFRS issue into play.  It isn't a done deal if there is dissention in the regulatory ranks.  There is a thought that after Cox steps down, who know what might happen.

The third reason that this speech is so worthwhile is that it provides such a great and succinct rebuttal of Cox's misguided crusade to move the U.S. from GAAP to IFRS.  If you are only going to read one document about the IFRS issue, then this is the single best document to read.

The SEC under Christopher Cox has done a great disservice to the accounting profession and to the larger investment community in the U.S.  It has taken the initiative to scrap GAAP without seeking to determine the will of the people or the greater good of the people.  As has been pointed out by Bob Jensen, the IFRS movement has questionable motives and simply does not pass the smell test.

The September 10, 2008 speech by Charles Niemeier is to the 21st century American financial market system as was Common Sense by Thomas Paine to the American Revolution.  Here's hoping that the common sens of Charles Niemeier will do as much good as the Common Sense of Thomas Paine;.

As the US and much of the world enters a financial and banking 'crisis' it makes us wonder how sound our banks really are. I'm sure those in the US have always thought and would argue that US banking is solid and fully sound. However, according to the World Economic Forum's The Global Competitiveness Report 2008-2009 the United States ranks 40th internationally in the category of soundness in banking. Yes, the great financial strong hold and economic powerhouse ranks 40th in banking! The US ranked below Estonia and Namibia and narrowly ranked above the UK.

Now, in another arena Canada is taking the lead and the title. Ranked on top and in first in the category of 'soundness in banking' is the land of "the true north strong and free" - Canada. Canada has the soundest banking system in the world! Bet you would have missed that in a game of Trivial Pursuit.

So, a very BIG kudos goes to Canada. Congrats Canada - Keep it up!

The top 15 most sound banking systems:

1. Canada
2. Sweden
3. Luxembourg
4. Australia
5. Denmark
6. Netherlands
7. Belgium
8. New Zealand
9. Ireland
10. Malta
11. Hong Kong
12. Finland
13. Singapore
14. Norway
15. South Africa

Sound familiar?

The book doesn't mention derivatives, subprime mortgages, or credit-default swaps, but almost all its significant points bear directly on our current fiscal crisis. Unfortunately (and I mention this in the review), the authors don't spend much time on a fix. But their macro-argument, in retrospect, has a lot to say about the underlying dynamics that led to this crisis -- I only wish I'd been able to read it after all this started, instead of before.

David Davis

Right now as I type, the world of money, shares and commerce seems to be coming apart at the seams. Nobody seems to want to buy Banking shares for any money at all this morning - not surprising since people will only learn the full list of more horrors this afternoon. Then, the Prime-Mentalist is screeching at poor little Iceland "Och-aye, the Noo, Jummieh!!! Where'z ma f*****g money????" (Not helpful I should have thought.) And the Euro waits in the wings to see what its walk-on lines are going to be.

It's all very well for those clever people who were optimists-in-full-possession-of-the-facts a few years ago to say "we've bought gold!" But most people don't own more gold than is worn on one finger, and sometimes not all of that. There are other priorities for most families, like just keeping going.

The EU of course continues to steam on, rearranging its deck-chairs to suit the sunbathing bureaucrats...there is talk of measures to "regulate" blogging, for example (see post below) as if the Brussels machinery had too little to do in reality, which is probable. I think measures like this will get harmlessly swept away in whatever happens to the Euro in the next few weeks.

This is not to say that the (very, very much nastier) British pro-EU bureaucracy will not get-a-hold of draft directives, and merely implement them as is they were real ones, while nobody is looking. It's called "gold-plating" in political circles, I am given to understand. I would not put it past them even to ram stuff through even after the EU was dead (a nice thought) so great is their visceral hatred for English culture, tradition and institutions (why did we think they wanted to do the jobs they do? Why would someone want to be a "diversity outreach officer", or a "parking attendant", or this, or this? (that one's even an "Australian Government Initiative" - that makes it even worse, for the cancer has meta-statised elsewhere.)  Why did real Germans and Austrians - and others - hurl still-living humans into incinerators? I don't see the moral difference really - we are merely arguing about degree.)

A tangible and to-be-wished-for benefit of this mess is that the EU will start to unravel also. The continental bureaucrats will probably live with that, continue to draw their salaries and lottery wins perks for as long as they can, and then retire to Tuscany or wherever, and pretend they are just jolly old folks who never really believed in the whole EU thing in the first place (they probably didn't, either.)

But we should watch out for the astonishimg vindictiveness and ferocity, which I believe will emanate from the UK's home-grown and now frustrated pro-EU establishment. This will come when it is found out that the whole shooting-match has gone belly-up overnight, and that these wicked, cruel and highly-motivated stalinists have lost their official authority to terrorise, erase, threaten, fine, regulate, confiscate and terminate.

Our problem will be what Frodo had, when he came home to the Shire, and found all sorts of riff-raff in charge.

Regularly scheduled programming on this blog will resume next week. Many deadlines looming.

2.  THE MISSION - A Manhattan Project codenamed (The Chicago Project) – to develop alternate sources of energy. All of the ones mentioned, but new ones like Fusion power/H3 from the moon and other impossible to think of energies.  We need enormous amounts of money to attack this problem with the greatest most creative minds we have. Sequester the people like we did in the Manhattan Project and get it done, and done first, so we can sell or license it to the world.  It really needs to be a race.  Oil is the past, drilling is a bad idea, once we start why would companies want to shut it down.  They will get comfortable with it and sell it to the American people like they have in the past. It’s the “Energy industrial complex” that will find a way to make us dependent on there heroin (oil).  Nuclear is also the past, managing the waste is a ticking time bomb.  Although I understand the need for some amount of it in the mean time, but if we set a 10 year goal to be live with these new future energies, oil and nuclear may not even be on-line by then.

3. THE PEOPLE - A New Deal type program to rebuild infrastructure. Soon we are going to have a large amount of unemployed.  Rather then pay benefits and receive nothing for it, employ them in a WPA style program and retrain them at the same time in the new infrastructure jobs of the future.  The old manufacturing jobs of the past are gone.  They are not easily coming back and maybe we don’t want them.  What we need to do is develop the new blue and white color jobs of the future, the ones that will replace the consumer products industry jobs of the past.  One would be in rebuilding our infrastructure.  The other will be the scientists it will take to do it.  When we are ready to roll out the new infrastructure and energies of the future we will need people to manage, transmit and repair the new industries. Infrastructure, science and energy will be our future. 

4.  REGULATION – Remove the laws that allow states like Delaware to be a safe haven for banks.  Credit is issued on merit with standards set by the Federal Regulatory Commission.  It’s math. If you have a credit score of 670, income of $50K, debts equaling X, you are either eligible or not eligible for a loan.  You either meet the standards or you don’t.  The idea that you could be charged 25% interest because your default rate is high is unacceptable.  That person needs to wait, like we did in the 1970’s, and pay off some of their debts, get more savings and try again in a year or two.  Are we going to shrink our potential borrowers and market size? Yes, but that will intern lessen our defaulters too.  It will make the economic ride sometimes bumpy but less of a roller coaster.

5.  ORIGINATION – Make it very difficult for the originator of a debt to sell it.  If I originate a loan to you, you own it till it’s paid off. Years ago when you got your mortgage from your neighborhood bank and they kept the loan till you paid it off.  The banker knew if you defaulted, it wouldn’t look good for him and his superiors would question why he approved that loan.  That’s called accountability.  Remove the ability of banks to sell loans and you’ll see how good the paper will become.  What we currently have is practically a pyramid scheme.  I do a questionable loan and off it to another bank. It then gets chopped up and made into a security and then that is sold to a mutual fund.  At each step, equity is pulled out and profit made from something that is worth nothing.  Then it makes its’ way to the final rung, which is a bad debt that has to be written off by someone.  Eventually, this pyramid scheme will fail.

Enter peer-to-peer ("P2P") lending. On the one hand, you have people with a need -- credit card debt, wedding bills, small business capital. On the other, you have people with a little extra cash looking for an investment. P2P lending networks provide the bridge between these two groups. The Internet provides the forum, making such massive online communities possible.

These communities typically take the form of either an auction-based marketplace or a "family and friends" network. In the marketplace model, anonymous lenders bid rates for loans to anonymous borrowers. The lowest rate bidder "wins" the loan. Examples of this social lending model include Prosper, Zopa and Lending Club. The "family and friends" model, such as Virgin Money, links borrowers and lenders who are acquaintances and wish to formalize a personal loan. The host network provides the formalities, but does not match borrowers with lenders.

When these networks function as intended, one or more lenders support loans to borrowers, usually between $1,000 and $25,000. The term is typically three to five years, with a fixed rate determined by the lender. These rates are usually lower than those available at traditional lending centers. Some networks limit potential borrowers by requiring a credit rating of at least 640. Others are less restrictive. The host network provides the credit check and procedural niceties for nominal fees.

But what happens when a borrower defaults?

P2P loans are usually unsecured, and the networks are not insured by the FDIC. Even though some networks are affiliated with banks or credit unions that subject them to governmental regulation, lenders have few solid options when borrowers cannot pay back loans. Most networks provide access to collection agencies that assist in the recovery of outstanding loans, though usually at the expense of a hefty fee of 15-30% of the recovered funds. The defaulting borrower is charged late fees, banned from the lending network, and reported to the credit bureaus.

P2P lenders are strongly cautioned to diversify so that potential defaults will have less impact on the lender's portfolio. Borrowers are cautioned even more strongly to use lending networks wisely, since an inability to pay back these loans can damage one's credit just as much as a default on a credit card or other more formal loan.

Additionally, small business owners should exercise caution before turning to P2P networks. Even sites advertising "business loans" are actually providing consumer loans based on the business owner's personal credit. Large amounts of debt, even if used for business purposes, can hurt an individual's credit score and reduce the ability to borrow larger sums from more traditional financial institutions in the future.

So do P2P networks work?

The initial results point to "yes." Even though some borrowers do default, Akash Agarwal, founder and chief executive of Green Note, points out, "The pressure to pay back a loan is pretty visible because you know where the money is coming from -- it's coming out of someone's pocket, not some bank warehouse." Borrowers thus feel an increased social responsibility to repay loans. On the other side, lenders feel like they are contributing to someone else's betterment, while still making a few dollars. Formalizing loans amongst family and friends also helps minimize the potential for divisive argument over repayment. The social welfare aspect, often lost at larger, more formal institutions, is thus an important and powerful motivator in the P2P scheme.

Economically speaking, P2P loans can be effective financial boosts when used wisely. They can help young borrowers or fledgling business develop credit. They can assist others in consolidating debt into more manageable payments and in beginning to rebuild credit. They can help pay for student loans when subsidized federal loans are unavailable or simply finance life events such as marriage or home remodels. They can also help grow wealth for lenders who are looking for a more stable investment. In theory, this manageable debt and wealth creation can develop a stronger economic base, even in tough financial times like these.

But is P2P lending legal?

There are a lot of legal questions surrounding P2P lending: How do lenders protect members’ privacy? How is identity theft prevented? How are taxes determined? But most importantly, how are these relationships to be regulated? Should these transactions be treated like private contracts? Should individual lenders be treated as agents of the P2P network? Should these networks fall under the umbrella of traditional banking regulation? How can current banking laws be adapted to this new system? What law governs when a corporation registered in Utah facilitates in a private loan from an individual in California to an individual in New York? Given the newness of online social lending, these questions are still being answered.

Increasing regulation is already changing the face of social lending, though. Although many P2P lending networks began as direct lending programs, several, such as Zopa and Lending Club, have shifted to selling financial products like CDs. For example, Lending Club recently filed a registration with the SEC. Under the new, more regulated system, Lending Club would sell payment dependent notes to lenders rather than organizing direct loans from lender to borrower. The proceeds of the sale of the notes will then fund the borrowers’ loans. The “personal” side is maintained through the lender’s ability to choose which borrowers receive these funds.

Many are blaming the current financial crisis on a lack of regulation. So why would we want to turn to a less -regulated system? The answer is that increasing regulation decreases the community appeal of P2P lending. More regulatory controls push these networks closer to traditional credit unions and further from "people helping people." While some control is obviously necessary, I would argue that too much regulation would cause the social lending system to break down. Social lending works because participants feel a connection with the people they are lending to or the people they are borrowing from. This human side encourages investors to invest and borrowers to repay. When regulation forces greater separation between borrower and lender, this incentive declines.

As with all things, only time will tell regarding the fate of P2P lending, but I predict it will continue to grow, especially if the economic instability persists. I also don't think the rise of grassroots lending is such a bad thing, especially since it re-injects a sense of personal responsibility into the financial world. Though it will not prevent future bailouts or replace the traditional financial system, I think it can become an important supplement. There are, of course, risks for both borrowers and lenders, but the small size of the loans, lower rates, diverse lending portfolios, and accountability involved in social lending help to minimize the overall impact of defaulting borrowers.

Now, I wonder if anyone out there wants to help finance a law student's education...

--Rachel Perkins

Photo courtesy of Tracy Olson.

The troubles sound familiar. Borrowers falling behind on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned. But forget the now-familiar tales of mortgages gone bad. The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.

That's bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They're hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. "The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit-card issuers.

The big firms say they're prepared for the storm. Early last year JPMorgan started reaching out to troubled borrowers, setting up payment programs and making other adjustments to accounts. "We have seen higher credit-card losses," acknowledges JPMorgan spokeswoman Tanya M. Madison. "We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."

But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up. That'll only make tomorrow's pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.

Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.

But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities. Mortgage lenders, in sharp contrast, typically aren't asked to do this—at least not yet. With consumers so shaky, now isn't a good time to put more skin in the game. "Costs will go up for issuers," warns Dennis Moroney of the consultancy Tower Group.

Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.

THE BIG BOYS' BURDEN

Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual's (WM) credit-card portfolio is subprime, according to Innovest. That could become a headache for JPMorgan Chase, which agreed on Sept. 25 to buy the troubled thrift's credit-card business and other assets for $1.9 billion. Says a JPMorgan spokeswoman: "We are aware of the credit quality of [WaMu's] portfolios and will manage risk appropriately."

Credit-card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed on Oct. 6 that roughly $3 billion of its $184 billion credit-card portfolio has soured, a 50% increase from a year ago. At the same time the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares BofA was offering. "The good news for us is that we have the strength to get through this, but the bad news is that the earnings recovery does take a while," says BofA spokesman Bob Stickler. "We are prudently adjusting our underwriting standards to adapt to changing economic conditions."

Likewise, American Express (AXP), which caters to wealthier borrowers, upped its provisions for credit-card losses from $810 million to $1.5 billion in the latest quarter, a sign that even upscale consumers are having trouble. "We have enhanced our credit models and continue to prudently manage our risk by scaling back some card acquisition efforts and reducing credit lines where appropriate," says an AmEx spokeswoman.

The industry's practices during the lending boom are coming back to haunt many credit-card lenders now. Cate Colombo, a former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, says her job was to develop a rapport with credit-card customers and advise them to use more of their available credit. Colleagues would often gather around her chair when she was on the phone with a consumer and chant: "Sell, sell." "It was like Boiler Room," says Colombo, referring to the 2000 movie about unscrupulous stock brokers. "I knew that they would probably be in debt for the rest of their lives." Unless, of course they default. Responds BofA spokeswoman Betty Riess: "The allegations do not reflect our practices. The bank has nothing to gain by extending credit to people who do not have the ability to pay us back."

Now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit-card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt.

LAST HURRAH

The Senate isn't expected to vote on the matter until early next year. The Fed's rules, currently being reviewed by the industry, could take effect around that same time. But lenders seem to be preparing for the worst-case scenario: an outright ban on some practices.

To get ahead of rules that would hamper their ability to reprice accounts, for example, many firms are jacking up interest rates. A survey of major issuers by consumer advocacy group Consumer Action found that 37% of firms have raised rates across the board, even for borrowers with relatively pristine credit records. "In anticipation of a federal crackdown, card companies are scouring their portfolios and tightening credit," says Tower Group's Moroney.

Even consumers like Michael Polemeni, who miss only a single payment, can find themselves in the crosshairs of credit-card companies. The independent computer specialist relied heavily on his credit cards for child support payments and business expenses. Polemeni generally made more than the minimum payment each month, carrying a $2,000-or-so balance. But in July he missed a payment, and Providian, owned by Washington Mutual, jacked up his rate from 9% to 30%. "I was shocked because I am a very good customer," say Polemeni, who paid off the full balance immediately. WaMu didn't return calls for comment.

Not everyone will be able to pay down their debts like Polemeni. And that could make for a vicious cycle: As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the issuers. Says Innovest's Larkin: "We are going to see the banks massively hit."

Zopa US

So while our model is doing very well in current market conditions, the US has been adversely affected in a way that just couldn’t have been predicted when we launched in the US and is no way the fault of our partners. For us, a real shame is that we weren’t able to launch the original model over there for regulatory reasons.

On a related not Zopa UK is showing double digit increases in volume since the credit crisis hit, reflecting all our belief, that the time is ripe for consumers who are seeking financial alternatives.

P2P lender Zopa reports soaring uptake as credit crunch bites | finextra

Zopa says that between July and September an average of 3700 borrowers joined per month, compared to 2500 a month in the previous quarter.

Explaining the surge, Sarah Kennedy, head, customer proposition, Zopa says: "Clearly the tightened lending criteria at the banks is helping to drive borrowers to look for alternatives."

Time for Regulation

Call me a socialist, I probably am, at least comparable to what Europeans are. I liked economics in school and I did well at it and the one thing I remember very clearly were the "sterile" models that were used for, well, everything. "All other things being equal" sound familiar? In real life, everything happens at once, its not standing still. The formulas used to calculate the derivatives, and indeed derivatives themselves, have been criticized by Warren Buffet as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Derivatives, according to the New York Times, are "exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis." Alan Greenspan and other members of the Fed fought for years against any kind of regulation for these derivatives, with their rationale being the private sector and the markets would act responsibly and that Wall Street could be trusted. Really?

My issue with so much of this stems from one very, very, painfully basic concept of free trade that you learn in basic microeconomics: Once government is introduced, free markets no longer exisit. No country on the planet has free markets; tariffs, taxes, social programs, tax breaks, tax cuts, tax credits...these all mean NO FREE MARKETS. The simple supply and demand graph gets all crazy when government is thrown in, meaning things cannot reach equilibrium. Equilibrium is the lifeline and purpose of free markets.

I don't understand how so many people can preach about free markets without realizing that our (foolish) commitment to them is actually hurting us. Other countries are taking advantage of our low tariffs (such as Honda and Toyota selling their cars here at very low prices) and then putting high tariffs on the goods we send (our cars in Japan are much higher in price because of Japan's tariffs). This is not free trade, free markets or competition. Look what this has done to the auto industry.

Moderation vs. Excess

Obviously, our point in this country with regard to free markets is to lead by example. But with the European Union growing substantially and having a higher GDP and population than the US, how can we continue to do this? Maybe its time to get in and play the game. Get some money, reap the benefits of being a big player. Dont't let other countries take advantage of us. Let's regulate some, protect what's ours and encourage true competition by working to set even tariffs or be prepared to raise ours in certain cases.

The Bailout is the first step to regulation and I really hope that it is done in moderation, because as much as de-regualtion has been loved by most in this country, we will all now suffer because of the excess of the elite few. Moderation is key. Its time to get in and play the game.