The Great Debate

How to stop the Whac-a-Mole of insider trading

Preet Bharara’s work rooting out insider trading is good news for U.S. investors, as long as you’re not one of the 240 people being investigated. But until governments tackle insider trading on a global basis, it’s like playing Whac-A-Mole. If your business model includes insider trading, you can pop up in Hong Kong or London almost as easily as Tokyo and Shanghai without much fear of prosecution.

That number — 240 people — is shocking. Prosecutors already have 57 convictions or guilty pleas since Raj Rajaratnam was arrested in October 2009, dozens more than during the Wall Street scandals of the 1980s. Bharara told the New York City Bar Association that insider trading on Wall Street was rampant. Rengan Rajaratnam, Raj’s brother, encapsulated the culture cynically but perfectly. Optimistic about his efforts to recruit a McKinsey consultant to their gang, he said to Raj, “Scumbag. Everybody is a scumbag.”

Alan Greenspan once famously said that the “market” would sort out financial fraudsters — regulators weren’t needed. Now we know the market actually includes quite a number of fraudsters who don’t seem to mind doing business with one another at all.

How did it get this bad?

We have been studying insider trading in Hong Kong for the past year. In reviewing enforcement of insider trading laws in major markets over the past 30 years, two factors stand out: the leniency shown crooks during the U.S. scandals of the 1980s and the effective tolerance of insider trading by governments everywhere else.

Twenty-five years ago last month, Rudy Giuliani and his team introduced the perp walk to Wall Street, handcuffing a Kidder Peabody arb in front of his colleagues and marching him out of the building. As one of the arb’s colleagues said, “if it was attention they wanted, they got it.” It was a good show, part of what’s needed for deterrence, but when it all ended six years later, most of the bad guys got off easy. Michael Milken was indicted on 98 felony counts and faced 755 years in jail. He pleaded guilty to six, was sentenced to 10 years, and was out in two. (Update: Milken was indicted on insider trading charges, but was not convicted and did not plead guilty to them.) His 1987 salary of $550 million didn’t quite cover his $600 million fine and restitution payments (Editor’s note: the original version of this column indicated that the fine Milken paid was $600 million; in fact, it was a $200 million fine and $400 million returned to investors). Ivan Boesky pleaded guilty to a single felony, paid a $100 million fine, and spent 21 months in a minimum security prison camp in California. Martin Siegel was out in two months. The most popular sentence handed down seemed to be a year and a day and federal guidelines at the time allowed parole after serving one-third of a sentence.

Why the bank dividends are a bad idea

On the basis of “stress tests” it ran, the Federal Reserve has given permission to most of the largest U.S. banks to “return capital” to their shareholders. JPMorgan Chase announced that it would buy back as much as $15 billion of its stock and raise its quarterly dividend to 30 cents a share, up from 25 cents a share.

Allowing the payouts to equity is misguided. It exposes the economy to unnecessary risks without valid justification.

Money paid to shareholders (or managers) is no longer available to pay creditors. Share buybacks and dividend payments reduce the banks’ ability to absorb losses without becoming distressed. When a large “systemic” bank is distressed, the ripple effects are felt throughout the economy. We may all feel the consequences.

The Trojan Horse of cost benefit analysis

By John Kemp
The writer is a Reuters market analyst. The views expressed are his own.

LONDON – Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?

It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.

from Don Tapscott:

20 big ideas for 2012, continued

The views expressed are his own.

What will happen in 2012? In the spirit of the aphorism “The future is not something to be predicted, it’s something to be achieved,” let me suggest 20 transformations (which Reuters will publish in four groups of five; the first can be found here). We need to make progress on these issues now to prevent next year from being a complete disaster.

These ideas are based on the research I did with Anthony D. Williams to write our recent book which comes out in January 2012 as a new edition entitled Macrowikinomics: New Solutions for a Connected Planet.

All 20 are based on the idea that the industrial age has finally run out of gas and we need to rebuild most of our institutions for a new age of networked intelligence and a new set of principles – collaboration, openness, sharing, interdependence and integrity. These big ideas will be the focus of much of my writing next year.

from David Cay Johnston:

Closing Wall Street’s casino

The author is a Reuters columnist. The opinions expressed are his own.

A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.

Not so long ago -- before casinos, currency and commodities speculation, and credit default swaps became big business -- U.S. courts would not enforce gambling debts.

Restoring this principle offers a simple way to shrink the rampant speculation in derivatives that was central to the 2008 meltdown on Wall Street.

‘Random refereeing’ of economy is not what’s stagnating it

Apparently, the U.S. economy is being held back by massive uncertainty over new regulation, future taxation and the deficit and how it will be handled, a state so frightening and confusing that investors won’t invest, businesses won’t hire and nervous consumers have taken to their beds.

That, at least, is the account of Dallas Federal Reserve President Richard Fisher, who, in a speech last week, blamed fear of the arbitrary exercise of power by those in government for slowing the economy and putting those who make, employ and spend in a “defensive crouch.”

“For some time now in internal discussions with my colleagues at the Fed, I have ascribed the economy’s slow growth pathology to what I call ‘random refereeing’ — the current predilection of government to rewrite the rules in the middle of the game of recovery,” Fisher told business leaders in San Antonio.

The slow death of the regulatory state

At a time when public spending and deficits are ballooning on both sides of the Atlantic, taxes are rising and governments are enacting far-reaching reforms to financial regulation, healthcare and carbon emissions, it might seem strange to talk about the withering away of the state as an economic and industry regulator.

The past year has seen thousand-page bills on healthcare and banking reform and the greatest-ever increase in government spending outside wartime, prompting small-government conservatives to complain bitterly about over-reaching by the Obama administration and the resulting threat to individual freedom, enterprise and wealth creation.

Advocates for U.S. banks complain heightened capital requirements and compulsory clearing of derivatives will hamper their ability to extend credit and raise costs for customers. In the United Kingdom, retailers have fought a high-profile campaign against higher payroll taxes. Everywhere businesses groan about the burden of complying with an inexorably growing list of government regulations.

America needs sensible, bipartisan financial reform now

– By Rob Nichols is president & COO of the Financial Services Forum. The views expressed are his own. —

Reform of our financial supervisory framework is a top priority for the members of the Financial Services Forum, and should be for our nation. In addition to protecting investors, consumers, and shareholders, bipartisan financial regulatory reform will bring much needed certainty to our capital and credit markets and help to fuel our economy and create jobs.

To maintain a position of financial and economic leadership, the United States needs a 21st century framework of financial supervision that protects the interests of depositors, investors, and consumers, and policy holders; ensures the safety and soundness of financial institutions; ensures financial system stability; and ensures an effective and competitive financial marketplace to fuel economic growth and job creation.  Stated another way, financial reform must minimize the chances of another fire, while providing the means for effectively fighting another crisis should it occur.

Wall Street’s biggest trade of the year

Wall Street’s famed army of lobbyists does not seem to have had much success pushing back on the regulatory overhaul bills now being considered by the U.S. Congress.

The Street remains perilously isolated in Washington, deserted even by its normal friends. As a result it has little influence over the course of bills that will have a significant impact reshaping the industry over the next few years and risks being steamrollered.

Isolation is the result of a basic miscalculation about how angry voters are about the financial crisis and its aftermath in terms of lost jobs and income.

Obama bank plan is good policy, good politics

– John Kemp is a Reuters columnist. The views expressed are his own –

President Barack Obama’s proposed curbs on bank size and proprietary risk-taking will be criticised for being vague, hard to implement, and focusing on issues that were only part of the cause of the recent crisis.

But the president should ignore self-interested counsels of perfection from the industry that aim to preserve the status quo. The plan is good politics, and good policy.
On the political front, the plan is a belated attempt to reposition the administration and congressional Democrats. It aims to channel the popular revolt that washed away Democrats in New Jersey and Virginia last autumn and now in Massachusetts.