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New Banking Regulations … Same Old Story

U.S. banks, drunk with greed, drove the nation's economy to the brink of financial Armageddon.

To save U.S. banks from losing their license to dangle the nation's economy over a cliff, the U.S. Federal Reserve and the country's elected elite threw them a bailout party and gifted them with
the accounting- world's version of "Transformers. "

Unfortunately, new banking regulations aimed at solving these problems are little more than the same old song and dance that forced the bailout – and stuck U.S. taxpayers with a multi-trillion-dollar tab.

A Year After the Market Bottom – Happy Anniversary?

This month marks the first anniversary of Congress putting undue pressure on the Financial Accounting Standards Board (FASB) to gift banks with the ability to transform losses into profits by replacing mark-to-market accounting with mark-it-so-I-get-a-bonus accounting. 

It's no coincidence that it's also the one-year anniversary of the bear-market low – from which emerged the near-record-setting stock-market rally that sent U.S. share prices on a 70% rocket ride.

The future of the stock-market rally and of America's position as the world leader in financial services and capital-markets innovation is wholly dependent on having a healthy banking sector. We have a window of opportunity to undo some of the desperate – but sometimes necessary – measures that were put in place to save the U.S. financial system from a complete collapse.

So if this market rally signals that the worst of the crisis is over, thanks to a liquidity-filled punch bowl being fed by a government spigot, and if banks are making so much money, literally in the tens of billions of dollars, why don't we use this "window" to really clean up the U.S. banking system? Why don't we close banks that aren't solvent, break up all the too-big-to-fail banks, and set the stage for a long-term economic rally and a revitalization of the world's faith in the American brand of global capitalism?

We should take these steps. Indeed, some brave souls already are trying to move us in this direction. But other forces are undermining necessary bank-reform efforts and obscuring the transparency needed to determine the true value of the types of securities that drove us into the credit crisis and the Great Recession.

Here's what's not making the daily headlines. And here's what you need to know to participate in the backroom discussions now taking place.

It's Apparent … it's Not Transparent

Frighteningly, there is still no transparency in the pricing of asset-backed securities (ABS), including mortgage-backed securities (MBS) and collateralized-debt obligations (CDO) that are all widely held by banks. The banks like it that way precisely because they can still hide behind the accounting gimmickry that masks unrealized losses.

On March 1, a new Financial Industry Regulatory Authority (FINRA) rule – which was approved last September by the U.S. Securities and Exchange Commission (SEC) – went into effect.

According to the new rule, any broker-dealer that's subject to FINRA and SEC oversight has to submit trade, price and size data on transactions in debt (bonds) issued by federal government agencies, government corporations, Government Sponsored Enterprises (Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are two examples) and primary corporate bond issues into FINRA's Trade Reporting and Compliance Engine (TRACE).

TRACE was established in 2002. It is the bond market's equivalent of the stock market "ticker tape." The tape is the scrolling data feed of all exchange-traded securities that lists the stock's symbol, the price of the transaction, and the number of shares traded – all in real time. Until March 1, TRACE only displayed trades on secondary corporate bonds. Trades in new issues of corporate bonds did not have to be posted.

In its conception, TRACE was designed to enhance the "ability to detect fraud, manipulation, unfair pricing and other misconduct" in the bond market. But while the new rules seem to add transparency, don't be fooled. Even if you read the FINRA release on the new rules, you may have missed an important subtlety: The rules apply to the bonds of government agencies and corporate bonds of issuers who package asset-backed securities; but they don't require any ABS, MBS, or CDO transactions to be posted.

There's another problem with this rule: It doesn't apply to banks.

Banks Pull End-Around on New Rules

In a letter to the Federal Reserve Bank and FINRA, the Regional Bond Dealers Association (RBDA) asked FINRA to suspend the new TRACE reporting rules because they correctly claim that it creates an unlevel playing field between bond dealers. According to the RBDA, bank-affiliated dealers constitute the Top 15 of all debt-and-equity underwriters in the country. The RBDA says that big banks are getting around the new reporting requirements by shifting transactions from their broker-dealer subsidiaries back to the banks themselves, since the banks aren't subject to the new rules.

So much for transparency.

On Oct. 1, two days after FINRA announced that the SEC had approved its TRACE reporting requirement and said the new provisions would take effect on March 1, 2010, FINRA issued another news release. The Oct. 1 release was a follow-up to the announcement that had been made the day before – or at least was supposed to appear that way.

Like its Sept. 29 predecessor, the Oct. 1 news release proposed the collection of transaction data on ABS trades. But there was one difference. This data would be entered into TRACE, but would not be publicly disseminated.

If you study the March 1 FINRA news release announcing the start of the new TRACE reporting rules, there's no mention of any trading data being collected on asset-backed securities. If you hadn't seen the earlier FINRA release, the only way to find that important tidbit of data would be to dig it out of the Federal Register, Vol. 75, No. 39 (Monday, March 1, 2010) – which is what I did.

Granted, this is a highly technical point.

But it's also highly relevant to the discussion at hand.

Neither FINRA nor the SEC has any authority over bank regulation. The SEC has authority over publicly traded corporations, but when it comes to banks the agency usually yields to each individual bank's primary regulatory authority. The new TRACE rules don't apply to banks: They apply to broker-dealers owned by banks and to smaller broker-dealers not affiliated with any banks. Big banks get a pass on two counts: first, they can route transactions from their broker-dealer subsidiaries through the banks themselves (thus not posting transactions and prices) and, second, they can route trades back through their broker-dealers when they want to post transactions at favorable prices against which they can mark the assets on their balance sheets. A similar "marking" technique, called "painting the tape," is used in equity trading when someone tries to post the last trade of the day at a price that benefits their position for margin or other purposes.

Since FINRA isn't going to disseminate ABS transaction- and- pricing information, these new rules will fail to create the transparency that has been missing from the U.S. banking sector and the U.S. capital markets. Remember, it was the lack of transparency into the pricing, types and amounts of liabilities banks were carrying on their balance sheets that served as a key financial-crisis catalyst in the first place.

FINRA has indicated that it may eventually post ABS- transaction data, but unless new regulations call for it, escalating pressure from institutions carrying heavy loads of these securities may ensure that the data is buried.The purpose of the "tape" is to show all exchange-listed transactions so that no back-room manipulation can distort equity markets (don't get me started on that one). TRACE was supposed to be a fraud-and-misconduct detection system for the U.S. bond market. Instead, it's a joke. Even worse, the new rules could actually now operate as a high-tech Trojan horse, giving still more inside knowledge to the Masters of the Universe who already possess major advantages by virtue of the massive capital pools and political influence that they control.

We clearly haven't learned a thing. As we observe the first anniversary of one of the biggest stock-market rebounds in U.S. history, it appears the driving force behind this bounce off the bear-market bottom was the healing and strengthening of America's banking system.

The truth, however, is that the new rules enacted to ensure this healing are nothing but a thin veil to further enrich banking-sector executives by pumping up their compensation pools. Given such a realization, we better make sure we have our stop-loss orders down and our hedges in place.

U.S. taxpayers and retail-level investors have been taken into the heart of the forest – and intentionally abandoned. The only way to escape is via a pathway paved by true transparency and real accountability.

At a time when banks are fat with profits – even as deep problems remain – these institutions should be prohibited from making bonus payments, and should instead be forced to write down all their non-performing assets in accordance with proper accounting standards. The projected bank bonus pools would cover most of those write-downs over the next few years.

We have a chance to celebrate a second anniversary of stock- market gains and another year of economic growth, but to ensure that prospect we need to start to break up all the too-big-to-fail banks. Once the giants are cut down to size, maybe we can have real transparency and not be afraid of being driven over a cliff by a bunch of greedy, drunken party boys.

[Editor's Note: Money Morning Contributing Editor R. Shah Gilani has seen it all – which is why his columns and analyses have been read by millions.

A retired hedge-fund manager and gifted analyst, Gilani is able to take readers behind Wall Street's "velvet rope," exposing pitfalls that can inoculate investors against ruinous losses even as he highlights profit opportunities that most other experts never even recognize.

Gilani's newest advisory service – The Capital Wave Forecast – is slated to debut next week. In that service, Gilani will show investors the monster "capital waves" now forming, will demonstrate how to profit from every one, and will make sure to highlight the market pitfalls that all too often sweep investors away.

Watch Money Morning next week for more information on The Capital Wave Forecast – as well as for the profit opportunities Gilani so regularly uncovers.]

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. JOHN WENTZ | March 12, 2010

    I would like to know why it is that my money and every other taxpayers dollars bailed out the big banks so they can now stay in business and now raise all the interest rate to the max. We are now paying them again to to steal our money and pay the CEO's big bonuses. To me, the person in the company that does the least amount of work, get the biggest wage.

  2. Hla Tin | March 12, 2010

    Can you write up a short note that I can send to my congressman or our senator? I will be glad to send a similar version to them.
    Thanks for information. HT

  3. Gary Semlak | March 12, 2010

    Why is it that this information hasn't (and doesn't) show up in the Wall Street Journal and other financial publications? Are our elected officials so corrupt that they know when to look the other way, or are they just brain-dead?

  4. Doug Stevens | March 13, 2010

    TERM LIMITS NOW!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  5. So True!!! | March 13, 2010

    A lot of people don't know that President Obama, Bernanke, and Jim Cramer are in a MOVIE about hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked-short-sold to near bankruptcy (5 cents/share), I liked it because it exposes the dark side of Wall Street and reveals some of their secrets. DVD is everywhere but cheaper at

  6. Ken Capurro | March 13, 2010

    The foreclosure crises has been compounded by our policy makers ignorance in the fact that the 80% that refinanced themselves into foreclosure kept the toys that they purchased with the home (atm) equity line, each and every case should of been audited and assets such as 80,000 BMW's and boats and motorhomes should of been liquidated and applied to the principal, instead we wipe out their second loans and reduce their rates.
    Ken Capurro

  7. bankalchemist | March 13, 2010

    there is a great story on the home page of how Ben Franklin saw early on the needs of the colonial period with the advent of land banks and gold. BANKALCHEMIST.

  8. ron | March 13, 2010

    The governmental axis of power is composed of the Government , Wall Street and Corporations . The majority of voters who elect the Government are too ignorant ( not necessarily dumb ) to vote for any politicians that do not appeal to their popular sentiments .
    Over 200 years of electoral political experience has resulted in the current reality where the self interest of the power axis has priority over common public interests and the power to sustain that priority . The disconflation of governmental , corporate and voters real interests never seems to happen since it ultimately involves the vexations of taxation .

  9. SYED ILYAS BASHA | March 14, 2010

    Let the responsible be bold enough to admit failure, collapse of age old financial system at least now. Let us also allow an alternative to emerge and save the humanaity. It is neither emotional outburst, nor blind urge. Definite it is the call of the humanity at large suffering at the hands of exploiters. The Equity based market driven financial system has proved its worth with its successful implementation, accepttance by all world over. Let not the negative approach based on hearsay, spoil chances of true turnout of the world economy being only talked about with half hearted and ill conceived old policies in new bottles.
    ISLAMIC FINANCIAL Concept emerging in its first form of the representative institutions known as "ISLAMIC BANKS" need to be look up as ray of hope; not to be looked down only to add to the darkness fast emerging in economic world.

  10. Mark Tisch | March 15, 2010

    Thanks for the info, Shah. I certainly appreciate Money Morning for providing the real scoop – even though it's often infuriating.

  11. Chandan | February 8, 2011

    I would like to know that what's the bankers right under regulation 15 , regulation 20 and
    regulation 22 with all clause

  12. Chandan | February 11, 2011

    Regulation 15 , regulation 20 and regulation 22 with all clause are not available in aforesaid link if it consist,plz send on my e-mail.

  13. Jane Doe | March 12, 2011

    Oh my God. I am a contractor working on a project for one the big three. Now I know the purpose of that project- to get around the new regs.

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