July Q&A: Shah Gilani on Too Big to Fail, Ron Paul and More...

It's time for our monthly Q&A session, so let's kick it off with your questions and comments about my June 14 article, "Why the Financial Industry is the Ultimate Liar's Club."

Q: Please talk more about the value of a Glass-Steagall-type "separation of powers," between banking, securities, mortgages (and insurance). Yesterday Jamie [Dimon] talked about how compartmentalized the functions are at JPMorgan, regardless of its gargantuan appetite for generating shareholder value. Not buying it... never did! But what is your view of the most efficient, and least corruptible, way to structure those activities? ~ P.

A: It's really, really, really simple. Only allow commercial banks to take in deposits and make loans and limit their size.

Where does it say that private enterprises have the God-given right to become so big (to make more and more money) that they threaten systems, the economy, and the nation? Nowhere. Let investment banks do what they do for the capital markets (keep ripping their clients off) but limit their size, too and require high capital standards.

Where does it say that private enterprises have the God-given right to become so leveraged that they risk blowing themselves up, contaminating counterparties and holding economies and nations hostage to their unmitigated greed? Nowhere. We need to keep it simple. Bankruptcy is the perfect antidote to stupidity and greed, but it only makes sense if enterprises aren't TOO BIG TO FAIL. This is not rocket science; this is A-B-C, easy as 1-2-3, do-re-me.

Q: I am about to move all my banking activities from Chase to a small regional bank. Are the smaller banks as bad? ~ Dennis B.

A: No, smaller banks these days are generally cleaner (they don't trade) and better in terms of transparency into their balance sheets and looking at their capital.

Do some homework. Ask for audited financials. If they balk at giving you any, then don't go there. Also make sure you're not putting more in any one bank than you're covered for under the FDIC. Plenty of smaller banks have commercial loans that may be problematic, but the crazy thing is that the regulators are far more "all over" those smaller banks than they are the big regionals and the universal banks.

Q: A very senior banker said to me recently [that] the JP Morgan thing was a storm in a teacup and that Jamie Dimon was a "good guy." I found that a depressing thought. Perhaps the loss is not large compared to the scale of their operations, but it does have a bad smell of market manipulation, which this time did not pay off as expected. I'd be interested in your thoughts on that ... ~ Alex C.

A: Jamie Dimon has to go. Bob Diamond (Barclays) stepped down; why should Jamie be allowed to sit on top of his bully pulpit pontificating about what's wrong with everyone except himself and his bank? He was a good manager, but he got greedy; he forgot what Sandy Weill taught him. He wanted to get so big that he was the bank. No bank is the market, and no bank or banker should be allowed to lie to the public, apologize like he's not really sorry, only that his team blew his cover, and still be allowed to pull the strings in Washington.

Did you see some of our sycophant Senators and Representatives question Dimon? Looked like a high school dance to me.

Q: What nags me is that the level of corruption is so deep, or high, whichever way you look at it, that there appears to be no one of any clout that can amputate. Would Ron Paul be such a candidate? ~ Roger C.

A: I think Ron Paul would be fantastic. He's different. I trust him because he's different, as in, not a lying, pandering, and pimping you-know-what.

Next up, your reactions to "Our Capital Markets are Broken."

Q: You say some $400 billion has exited the market. Where has it gone? Do banks have that much more in savings and checking accounts? Do bond funds and bond sales show tremendous increases? Where is it? ~ Richard V.

A: A lot of that money has gone to the sidelines, which means everywhere from sitting as cash in the accounts where it was once applied to equities, to money-market funds and banks, to under mattresses. Something like $50 billion has gone into bond funds since last October. And to really put an exclamation point on flows into bonds and out of stocks, according to Morningstar, in the last five years, $700 billion has been poured into taxable bond funds. That's about $50 billion more than what poured into equities in the late 1990s... and you remember what happened then, don't you? Just saying.

Q: I'm on the sidelines and inflation and devaluation are eating me up. What do I do? ~ Scout

A: Scott, if you can't beat "em, join "em. Trading isn't an evil proposition. It's a way to play the game, and win. Maybe you can come off the sidelines slowly and start taking some positions. If they are working, stay with them, ride them, but keep raising your stops and get out with a profit if they stall and backslide. Nothing lasts forever, especially in the new market. And, more importantly, if you get into positions and have losses, take them quickly. Small losses sting, but they won't ever kill you.

Q: All right, so when does one play a crooked game? Answer: When it is the only game left in town. ~ Henri S.

A: Or, as the song says, "Rules are all right if there's someone left to play the game."

Q: I don't want to sound mushy, but you're my hero Shah. I have been beating the same drum for anyone around me to hear. You have the podium to make the drum beating mean something. If only the government would make fast trading illegal, it would open the field for investors to return to the markets... Unless I sit at my computer all day to watch my stocks, my exposure to loss is greater with these thieves (fast traders) in the market place. ~ Jeff P.

A: Jeff, I don't have a problem with traders and trading, per se, but if you're saying kick the HFT crowd out of the capital markets, I am 100% with you, and you've got "hero" status of your own with me.

Q: I suppose the best we can hope for is to make it while we can via your ability to see the "wave" forming and rolling in from the conditions in the market and surf with them into a temporary form of wealth that allows for the purchase of shelter, food, supplies and everything it will take to survive in relative comfort... until national leaders rise up to save our Constitution (which will hang from a thread) and begin the enormous task of putting America, and ultimately the world, back on a footing that leads to civility and prosperity. ~ Dr. Robert D.

A: Dr. D., let's hope (and work towards) making our gains not temporary, but a rolling accumulation of more winners than losers; because one thing's for sure, no one likes losers. As far as our corrupt legislators and the Wall Street crooks who own them, their time to pay the piper is fast approaching.

Q: Agreed that the markets are broken... now tell us more about that lady you met. ~ David E.

A: Well David, let me put it this way. Sometimes it's not easy being a trader. Although "buy and hold" has a place in my heart (I'm a hopeless romantic), it just doesn't seem to be part of my good fortune.

Now for your (strong) reaction to this week's "Why I'm Seeking a New Independence Day."

Q: I believe as you do, that the people of this nation need to get up and stand up for their rights. But many people that I speak to, like family and friends, say there is nothing to stand up for. They say we are freer than any other nation on earth and that I am concerned about nothing. So I wonder, will anybody join us in our fight to gain back our independence? Or is their faith in government, to take care of them, so strong that they will bow to it? I, for one will not bow. Thank you for your insights. I feel less lonely, knowing there are other people who are like minded. ~ Rose

A: Rose, what is eating like a cancer at this great nation is indifference. Too many people either have it too good to care about the have-nots, have too much faith in a government they don't participate in, or flat-out gave up on participating because they don't think their voices and votes matter.

We need to never forget that ours is a government of the people, by the people, and for the people. Thank you, Abraham Lincoln; and thank you Bob Marley, for singing, "Get up, stand up, stand up for your rights!"

Q: The saddest part about this, if we try to do something - we can get labeled. The U.S. is quickly becoming the "Land of the Controlled and the Home of the Uninformed." Pathetic! ~ Skip C.

A: Maybe that's true, Skip. But there's no maybe when it comes to where we'll end up if we don't try. I'm out there saying what I say, pointing fingers, and naming names. And, as was once said by a great American, I "would rather be assassinated on this spot than surrender it." Any idea who said that?

Q: If I remember correctly it also says somewhere in the Constitution, something along the lines that people have a right, and in fact should... replace the government by means of REVOLUTION. While now it has been made a crime to protest, or occupy, it is still legal to replace the government (and the laws that have been recently passed) by starting a revolution [which] means you overpower your opponent by using FORCE. I am starting to feel that there is little hope for the people of America to change things by "peaceful rebellion." ~ Taika (from Finland)

A: There are peaceful revolutions where the power of the people as shown by their sheer numbers, through peaceful demonstration and force of will can topple any government. Lest we forget, as long as the soldiers of the oppressors are the sons and daughters of the people being oppressed, there is always hope.

Q: I just happened to read on Stalin's legislation in the "20s and "30s. What's happening now in this country bears an uncanny resemblance. ~ Mart

A: Mart, I just finished Martin Sixsmith's extraordinary new book, "Russia: A 1000-Year Chronicle of the Wild East." And the parallels between the rise of despotism and Stalinism, in particular, are increasingly, sickeningly, and frighteningly evident in these United States. It's all about instilling fear in the population that their freedoms are constantly under attack, and that only by destroying any internal opposition (to the absolute power of the state) and any outside threats to the state of the State, will the population be safe. Power corrupts, and absolute power corrupts absolutely.

What America needs are more men and women of real character to stand for office and challenge the all-powerful institutions that buy and sell our legislators, regulators, and the spineless sycophants that line up to take their place when they retire, usually in luxury.

Q: I'm presently in Cambodia, where the people basically have no rights, and it's not a stretch to see that your great country is adopting some of the tactics used here to keep the people down while the government does as it pleases. ~ James T.

A: James, thanks for pointing out another parallel.

Q: I enjoy your posts daily. And maybe I will share my bread with you when we meet in the breadline. ~ Terry B.

A: You can be sure that I'll share mine.

Next up, here's what you had to say about the Barclays rate-setting scheme in "Dirty Stinking Libor."

Q: I worked for Barclays for 19 years and left them because I knew what they were doing to customers. They were being rooked left and right, but in those days no one would listen. I urge everyone to check the interest and charges on their accounts - I found a "discrepancy" on my own accounts when I was in business, to their favour, amounting to thousands! I got some of it back but with a dentist's pliers! This latest episode should really sound the complete end to how banks operate. If they have to borrow from one another to keep solvent, then those having to borrow should be allowed to go down. In that way, any QE should go directly to depositors and not the banks concerned. The size of the QE would be so much less and our currency wouldn't take such a bashing. You never know, it might just save going back to gold! ~ Peter C.

A: Peter, you should run for office, really. Thank you for sharing your experiences and insights.

Q: Are the regulators the same folks who got Martha convicted? ~ Sabin B.

A: Not only is that funny, but it's sad too. Yes, they are one and the same. Going after Martha Stewart with a fire hose when Rome was and is burning says it all. The regulators are captives of the industry they are supposed to police. But, hey, you know, showing some teeth sometimes makes you look... well, friggin' idiotic.

Q: What's amazing to me is that anyone ever trusted such an idiotic system in the first place. It's like relying on the fox to manage the henhouse and then being surprised when he lies to you! ~ Blair D.

A: Ohhh, you are so right, Blair.

Q: If insider trading is someone trading on information not readily available to the general public, then isn't high frequency trading just insider trading with a computer? ~ Tom

A: Brilliant! I never thought of it in those terms... but you're absolutely right.

Q: There's a law for us and a law for them; there's no "rule of law;" there are multiple "rules" depending on where you sit in society's hierarchy. ~ Art

A: Artfully said, Art, and right on the money.

Q: What do you advocate to replace the Fed, Wall Street & Co., and our current banking system with when the Fed is finally abolished (which will probably require a mass pardon or the dissolution of the USA)? ~ William

A: William, I'm glad you asked, because I'm drafting a comprehensive alternative regulatory and crisis resolution apparatus to the Fed. It's taking a while because of trying to take account of who's going to survive the shootout at the fantasy factory. But stay tuned... it's coming. I'll give you a hint... less is more.

Q: I've a question... I read something recently about the "global debt crisis" that said something to the effect that the real problem isn't the debt, per se (though it's a problem, no question, as the interest paid might be constructively used elsewhere), but that the debt is collateral for a massive multiple of GDP in derivatives... I'd love to get your explanation of that part of the picture sometime, please. ~ Matt G.

A: That makes no sense to me, Matt. Maybe you can forward that article to me. I'd like to try to make sense of it for you.

Q: Shah, I would like to have your views on the case of the "rogue trader" Jérôme Kerviel in France. ~ Pat

A: Just another tempest in a teapot. I'm kidding, of course. Actually, just a simple case of a stupid idiot trying to prove to himself and his bosses that he wasn't a stupid idiot... I say to Jérôme, good luck with that.

Q: What I would like to see is a list of say, the top 10 people who are screwing the rest of us. The politicians and mainstream media don't have the jam to do it. I think you do. It would be fun. People need to know who is responsible. I understand the legal ramifications, but that hasn't seemed to stop you so far. ~ Mike M.

A: A top-ten list... I love it! Brilliant. I'll do it. There goes my security budget. Those retired Mossad guys aren't cheap, but boy, are they good!

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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