You want to know why the entire global financial system almost collapsed in 2008?
There seems to be a simple answer. Not encouraging, but simple: The European Commission is exploring the possibility that there was a conspiracy among 13 of the world's major banks that colluded to keep the entire house of cards a secret.
In a press release Monday the European Commission announced it sent a "statement of objections" to Bank of America Merrill Lynch (BAC), Barclays (BARC), Bear Stearns , BNP Paribas (BNP), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), HSBC (HBC), JP Morgan (JPM), Morgan Stanley (MS), Royal Bank of Scotland (RBS), UBS (UBS) as well as the International Swaps and Derivatives Association (ISDA) and data service provider Markit.
This statement of objections is a formal step in EU investigations that charges the banks, the dealers' association, and the swaps pricing agent and index controller of "colluding to prevent exchanges from entering the credit derivatives business between 2006 and 2009."
The companies are then expected to answer the charges.
"If, after the parties have exercised their rights of defence, the Commission concludes that there is sufficient evidence of an infringement, it can issue a decision prohibiting the conduct and impose a fine of up to 10% of a company's annual worldwide turnover."
Part of the antitrust behavior of the accused, besides controlling pricing of derivatives to their exclusive benefit, would likely address their complicity in veiling the entire market to deflect fears of counterparty exposure, concentration of risks and leverage in the financial system.
Behind the Veil: Where the Elite Meet
How Big Corporations Are Destroying the "Free Market"
As an economist, I wince whenever I hear someone say that we live in a true free market.
The reality is we live in a semi-free market where regulation stifles business and corporate money influences and distorts what would normally be a highly competitive marketplace.
And over the last two decades, the situation has only gotten worse for consumers, producers, and defenders of the so-called "free market."
From 2008 to 2010, 30 major corporations paid more money in lobbying fees than they did in taxes, according to the Public Campaign.
But while traditional lobbying once centered on altering tax rates and encouraging legislation to liberalize and deregulate the economy, it has now evolved into a competitive weapon for companies trying to box out competitors and raise barriers to entry in their markets.
It's a business phenomenon that I like to call the "Rise of the Fifth Rail."
You see, in traditional markets, companies compete on four specific principles: Price, product quality promotion, and place (market access). These principles are known as the "four P's."
The first three are self-explanatory in that customers want the highest quality product at the cheapest price. Companies use promotional techniques to instill a need for its products and do so by marketing against the offerings of a competitor.
The fourth principle centers on a company's ability to reach new markets and still provide low prices for high-quality products. A strong coordinated distribution network tends to make this possible.
Naturally, when all four work together, you end up with a company like Walmart (NYSE: WMT), which has the ability to provide low, everyday prices due to its best-in-class distribution network.
But over the last few decades, this new phenomenon of using lobbying as a competitive tool has altered the course of market economics, and driven fair competition into the ground.
And that phenomenon is rotting the American free market from the inside.
It's Enough to Make Your Blood Boil
Here are two items that will upset you...
First, back in February, Attorney General Eric Holder christened the unofficial official doctrine of "Too Big to Jail."
He told Congress, "The size of some of these institutions [TBTF banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute - if we do bring a criminal charge - it will have a negative impact on the national economy, perhaps even the world economy."
Of course, it was only the christening of another neat little name.
Check Out Who's Hiding $32 Trillion in Offshore Accounts
More than two million emails that shed light on the biggest tax dodge in history - trillions of dollars hidden in offshore accounts - have been uncovered by the British newspaper The Guardian and the Washington, D.C.-based International Consortium of Investigative Journalists (ICIJ).
Some $32 trillion has been hidden in small island banking hubs which host a bevy of trust funds, shell corporations and other tax havens, the Tax Justice Network estimates.
This money is to the financial world what the Higgs boson and dark matter are to particle physics: It's tough to prove it's there, but the universe doesn't make much sense without it. It's just a matter of connecting the money to the people hiding it.
That's been a tall order... until now.
A Simple, Scary Way to Neuter Goldman Sachs and FriendsÂ
TBTF is the acronym for "too big to fail."
It's the crazy notion that certain banks are so large and systematically important (which really means so threatening to financial systems) that they must be kept alive by the government, because their failure would wreak havoc on the economy.
How will they be saved from their own greed? And how will we be saved from their greed so we can kneel at their altars another day?
Central banks and governments, who are not as powerful as central banks, will backstop them with printed paper and taxpayer blood. That's how they'll be saved, grow bigger, and one day rule the world.
Oh, that already happened... never mind
There is No Such Thing as a "Safe" Big Bank
Thank goodness we have the FDIC and the Federal Reserve and Congressmen and women.
Thank goodness they're willing to tap the captive citizenry for as much cash as they need to back the Fed and the FDIC to safeguard our big, beautiful banks from... themselves.
Only, there's a problem.
Big bank "safety" is only a myth.
The Next Bank Meltdown Won't Be an "Accident"
Big banks turned in a pretty stellar first quarter. All but one beat profits expectations. But as I told you last week, I'm now out of these stocks completely.
Do you want the truth about what shape banks are in right now? Sure you can handle it?
I'm sorry; I can't tell you the truth.
Regulators can't tell you the truth.
And the Federal Reserve won't tell you the truth.
No one can tell you the truth. That's because banks don't tell the truth. And neither does the Federal Reserve.
Why There's No Real Inflation (Yet)
According to Milton Friedman, "inflation is always and everywhere a monetary phenomenon."
If that is true, then you have to wonder where the heck all of the inflation is.
Every central bank in the Western world is holding interest rates down, and almost all of them are printing money like it's going out of style.
Five years ago, nearly every economist in the world would have told you this would cause inflation to skyrocket, and the big deficits governments were running would make matters even worse.
Taken together, monetary and fiscal policies are far more extreme than they have ever been.
Yet, inflation has remained rather tame. In Friedman's world that just wouldn't be possible.
But today inflation is only running at around 2%--well below where it should be according to his monetarist theories.
What does it all mean?....
It means even Nobel Prize-winning economists can get it wrong-at least in the short run.
Here's why Friedman has been wrong on inflation so far. It starts with his basic theory.
Here's What President Obama's Win Means For Your Money
Bitter, negative, expensive...I am hard pressed to find any positive adjectives describing this year's presidential campaign.
Evidently, the markets are struggling, too.
As was widely expected leading up to the election, all of the major averages got slammed in early trading on news of President Obama's victory. Just over an hour into yesterday's session, the Dow dropped 262.51, the S&P 500 tumbled 27.58 and the tech- laden Nasdaq fell 59.55. Oil tanked 2.95% and $2.62 per barrel to $86.08 while 10-year bonds saw yields plummet 6.20% to 1.63%.
There is a bright side, though. Now that all the hoopla is over, investors can get down to business.
Here's what I'm expecting:
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How the Fiscal Cliff will Deal a Blow to U.S. Defense Industry
The fiscal cliff is taking down more than U.S. taxpayers - it will tear through the U.S. defense industry.
At the end of this year, current tax policies are set to expire and new ones will go into effect at the start of 2013. What Americans can expect if the policies are not extended is a painful combo of tax increases and spending cuts that will thrust the struggling U.S. economy back into a recession.
If U.S. lawmakers fail to act, scores of economists agree what we'll get is a $600 billion drag on the already sluggish economy. The tax implications have been widely discussed, but there has been little chatter about the impact on the defense sector, which stands to sorely suffer since it is subjected to half of the proposed spending cuts.
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