Q&A: Shah Gilani on Financial Regulation, Central Banks and More...

I got hundreds of questions and comments this month from you about my stance on regulations. Let's see why.

Q: I agree with you on the need for financial regulation. However, they must be simple and clear... How would you write the regs? ~ Cory B.

A: Cory, all the regs I would write would be one-liners. That's no joke.

Q: What we need is a hammer. Not the kind carpenters use, but a judicial hammer which treats serious crime seriously. No more civil trials for criminal offenses, such as the debacle surrounding Richard Fuld. These thugs know how to weigh odds, and most of them will gladly risk 15 months in a white-collar prison at hard tennis for, say, a few million in ill-gotten gains. You can't fix fraud, but you should be able to make the punishment so severe that only the dumbest of the dumb would give it a try. ~ Ron S.

A: That's what I've been saying. How come so many of you say it so much better than me? I'm always learning from you all.

Q: To put faith in regulation and the regulators is to assume they can't be bought. They can always be bought. Whaddya gonna do? Reform the existing corrupted agencies? Get rid of the Gensler/Goldman-run CFTC and replace it with something else? And who would run that? Somebody from JPMorgan? ~ fallingman

A: I want teachers (grade school and junior and senior high school teachers) to be our regulators. They obviously aren't about the money and they obviously are civic and civil minded. Why not?

Q: Who is going to put the "black and white" rules in place, the regulators? lol! Regulators are currently paid by the banks they regulate, umm, but, isn't that a conflict of interest, or, am I just stupid?~ Domina L.

A: Stupid is as stupid does. If we go back to the way regulators regulate, we're all stupid. We need a new breed of regulators. Expecting that we'll ever get them to come down from Olympus is proof that I am stupid. But a boy can dream, can't he?

Q [re: Let's Give Regulations Force and Power]: I agree that mobetter laws and regulations need to be written, but first the existing laws and regulations need to be eliminated. Then the new laws and regulations need to be written by someone who is not a lawyer or politician. ~ Ricky

A: Get me those teachers... it's summer, they aren't doing anything. Well, that's not exactly true. That beautiful teacher creature, you know who you are, who I just met at PJ Clarke's in NYC, is working on her tan at the beach.

Q: What we really need are leaders and regulators with real intelligence (not just political savvy) and most of all a very large dose of character - know of any? ~ Bruce M.

A: Yeah, but they're all dead. Read "Team of Rivals." Abraham Lincoln was so amazing; he was exactly what a politician should be. He and George Washington should be every man's high water mark as far as character, integrity, honesty, sensibility, temperament, and leadership. We should always be looking for another Washington and Lincoln. They're out there. Please stand up, gentlemen, and come lead us.

Q: Any government regulation in finance/economics is anathema, and is what got us into trouble in the first place. Total responsibility of each and every one of us, whether business or finance or whatever people, is an absolute necessity for a free society. And so is laissez-faire capitalism. Government is the use of force, and that use is never appropriate other than self-protection, or protection of our nation, states and municipalities. ~ Anne K.

A: Oh Anne, if only! You are a hopeless romantic, I know, because I dream the same way you do. Only, I woke up.

On account of the fact that personal responsibility is anathema to so many people, we will always need walls and bridges, such as regulations are, such as governments are, to protect us from our bad, irresponsible neighbors. Remember, good fences make good neighbors. And, "once I dreamed I was in a Hollywood movie, and I was the star of the movie."

Q [re: Republicans and Democrats Have it Wrong]: One thing I miss completely in your post is the notion of individual responsibility. Did anyone *force* all those millions of people to use their houses like ATMs, take on the "liar loans," and in general act financially irresponsibly? Did anyone *force* millions of people to keep voting for politicians who put in place laws like the CRA which didn't just incent but, at the risk of nasty examinations by government agencies, practically force many banks to make too-risky loans? ~ Patrick

A: Perhaps you'll agree with me, Patrick, that "force" is a force in and of itself. It manifests itself through individuals and very often through the masses as though they are one. But, just as we can't force individual responsibility on anyone (kind of wish we didn't have to), we can't expect that the force of popular delusions would ever be derailed by group responsibility.

I am saying that the human condition is such that, while we are all individually responsible for our actions, outside forces can - and do - corrupt us by infusing us with an acceptance of what others deem acceptable. If you can figure out how to make individuals responsible for everything they do and say -and I mean responsible to the point that compassionate, objective thoughtfulness always precedes action - we wouldn't have to wonder if there is a heaven. In the meantime, all we can do is be "cause in the matter" and lead by example... or try.

Q: Shah, I can't give you enough credit for taking this position on regulation, even though it is not a popular one among conservatives. You are breath of fresh air among the writers I subscribe to. This point is something they never talk about. It's always all of these platitudes about getting the government out of the way of big business. I would like the government out of the way, too, out of big business and out of my business, but the fact is that almost every day there is a new story about fraud. Human nature is not going to change, and with today's technology, there are almost an infinite number of ways to rip off the unsuspecting. ~ Charles

A: Thanks Charles. Because it is what it is, the best we can hope for is mobetter regulations.

Q: OK, I'm a dreamer... But, what if compliance with government regulation was a business option and purchasing government compliant products was a buyer's choice? Vendors could choose to offer products that were "Government Approved" in the same sense you see "UL Approved" for appliances. Businesses seek the blessing of research and ratings organizations such as the "Good Housekeeping" Seal of Approval, good ratings in "Consumer Reports," the Consumers Union, etc. Let the buyer beware. Some would choose the "safety" of government approval, and others would be persuaded by vendors who claim to design products and services "better than government approved." Then, government regulation would stand the pressures of market competition... and that would seem to be a good thing. ~ John W.

A: John, I love you man, but go back to sleep and dream another dream; your last one is a nightmare.

Q: Though I don't disagree that there needs to be a fairly limited number of "rules" (to dissuade people from doing things that are wrong (eg: fraud, theft, extortion, bribery, etc.), I don't think it will ever be effective unless the enforcers are held accountable. ~ Mark D.

A: Mark, you are ABSOLUTELY right!

Q [re: The Woes of Regulation]: Shah, your tongue is firmly planted in your cheek. Your ability to put levity with a sad tale is a sure sign of your own insanity. HA HA ~ Larry

A: You calling me insane, Larry? So, you know me!

Q: Think of banks as public utilities who provide financial services. Electricity, gas, water, sewer, telephone, television, radio, etc. are all regulated, I see no reason for banks not to be controlled by the some level of government. ~ Don.

A: 100% agree!

Q: I am wondering where the "fines" that are collected go. Is that for the buddies at the SEC? ~ Robert O.

A: All the regulators go out to dinner with the collected money and get so drunk that they end up back at work the next day doing the same good job they always do.

Q: Is Evil winning the war against the Good? ~ Luis G.

A: In some quarters, yes.

Q [re: Glass Stegall is a Dream Worth Revisiting]: Is [Sandy] Weill for "real" or is this another "sham" with ulterior (self-enhancing) motives? ~ Jeff A.

A: I believe him. He's a good man. Sure, he got a little too into his behemoth building, but hey, he was the master builder and the best at it, maybe ever.

Q: Hmmm... Sounds like a death-bed conversion, welcome but always to be taken with a large grain of salt. ~ Alan H.

A: A conversion is a conversion is a conversion. Who cares when it comes, just bring it on.

Q: With G-S Act back in place, businesses could plan and borrow from their Vanilla Bank while the Casino "Banking" trader teams can legitimately play the odds but with their own money facing whatever the consequences. ~ Harry B.

A: Yep, it is just that simple.

Now let's move on to some of your other questions and comments.

Q [re: Central Banks are the Problem]: Central banks going away? After the hundreds of years of sucking up wealth, there is nothing that exists on this planet that the central banks do not own, including you and me and all the war-making and policing power they need to keep what they own. ~ Glen H.

A: Ouch. I would say that's harsh, if it wasn't somewhat true. But the central banks don't own us; it's more that they are the backstop and launch vehicles for their constituents, the banks they serve like indentured servants, who we are indentured to.

If you want to stop the snake from strangling you, but you can't because it's too tightly wrapped around you, you cut off its head.

Q: Banks need to get back to the business of helping build strong communities instead of manipulating the markets for their gains. ~ Mike

A: You're right. And it is just that simple. How come it takes me so long to say the same thing? Thanks, Mike.

Q: I believe the only solution that nobody talks about is: Nationalize all the big banks and central banks making the governments the direct owners which means the taxpayers will be owners. Secondly put all top management personnel of these institutions under civil servant rules, which means fixed salary fixed perks and lots of supervision by state plus nice jail times with hard labor whenever you do criminal things. It will make banks lethargic but take out all these Casino activities that they engage in. Now are you with me? ~ KJS

A: Sorry KJS, I can't agree with your main premise, that banks should be nationalized. We need innovation and entrepreneurship behind our banks. Civil servants running the banks? Are you offering the downtrodden postal workers of America new jobs? Or the folks at the DMV? You are too kind.

No, I'm for free enterprise, just not a free-for-all. Break up all the TBTF banks, limit their size, and treat them like we treat the utilities that are the backbone of America. As far as your other ideas on what to do with criminals... you had me at hello.

Q: Without any serious effort to curb spending at the federal level it's all p*ssing into the wind. I am afraid that it will ALL have to crash and burn. Corrections happen and all the Fed's horses and all the Fed's men will be too busy getting re-elected to notice that Humpty has already started to fall. ~ Steve

A: He's already fallen, Steve. "Help, I've fallen and I can't get up!" Where's that life alert button when you need it? It's just a matter of time before the markets fall off the matchstick wall they rest on. It used to be the economy falls and markets followed quickly, or markets would discount the coming fall in the economy and lead it down. Now the relationship between the two is so manipulated, you have to actually be behind the curtain to know that the levers are grasped by some pretty greasy hands. It's all a game now.

Q: Could you do a write up on the HSBC scandal? I think this is even bigger than Barclays/Libor. We now have two of the few banks which came through the crisis without needing a bailout, being found guilty of the sorts of criminal behavior which would make them (for major institutions) "the bank you must not bank with." Surely this will lead to deposits be pulled and banking arrangements terminated, i.e., a bank run. What do you think? ~ Alexandra C.

A: Alexandra, I'm working on it. It's really a sordid tale and would make one helluva movie, but it would have to be rated XXX. I'll come up with the R-rated version for you folks shortly.

Q: What Wall Street folk need is a code of honor that resides within their very souls and which directs them toward the greater good without the need for government regulation. Their existing code can be summed up in this corrupted Boy Scout type of motto:

On my honor I'll do my best,

To help myself

And screw the rest. ~ Gary S.

A: They actually have a code, you know that: "Greed is good." It's in their souls and directs them. It's all "good," you know!

Q: The "depression" was bad, but it only lasted three to four years. All the excess was blown off, and the economy cleaned out and took off. Our "slow growth" and deficits have lasted six years already, and are getting worse. The working man is the slave to the rich puppet masters who make nothing... they just move paper around. Dump Bernanke... dump the Fed. Bring on the depression. Let's get it over with and start over! ~ Robert

A: You totally get it. Now help me spread the message: Free the Free Market!

Q: Wall Street's motto should be "Crime Pays!" ~ Dave F.

A: It already is, was, and has been, Dave.

Q: The financial services have become a parasite on society as a whole, and they will not stop until the host collapses, at which time they will die as well, and hopefully there will be an opportunity to pick up some pieces and try to get things working again. In the meanwhile, they are in essentially complete control of the power leaders of both political parties, and any hope that we can bring them back under control by political means is a pipe dream. We are trapped on this runaway train, and all we can do is brace for the crash. ~ Gordon F.

A: "Old Charlie stole the handle, and the train, it won't slow down," sang Ian Anderson of Jethro Tull fame.

Maybe you're right. After the crash we can pick up the pieces and start again, and get it right. Okay, you know what I say at times like this... "Good luck with that!"

People like making money without working, by creating paper games to play on their computers, where the paper (securities) is ultimately money. After the crash everything will go back to normal, the new normal, which is where we already are, which is abnormal. Welcome to the Matrix. You're in the game, and it ain't ever changing, so you might as well learn the rules, break them and make some money for yourself. Make that runaway train the gravy train, that's the one I ride. All aboard!

Q: Shah, I assume you are a very busy individual, but if you have not read the book "The Creature from Jekyll Island," by Edward Griffin, I politely urge you to read it immediately. What you call the Matrix is actually very documented in this book. I couldn't put it down once I started reading it. Not because I had found a delightful book but because each sentence disgusted me, horrified me and revealed truths that are cleverly hidden from the masses. Truths that are now springing leaks into the public but the Matrix is absolutely all encompassing in our civilization at this point.~ Eric T.

A: Eric, thank you, we're on the same wavelength. I just finished "Team of Rivals," the masterwork, seminal book about Lincoln, his honesty, integrity, genius, politics and how America should be lead. I highly recommend it, it's absolutely brilliantly written by Doris Kearns Goodwin.

And I just picked up "The Creature..." I am already spellbound and I haven't even gotten to the first chapter! My bad is that I haven't read it before. Like "Team of Rivals," I'm sure it will open up vistas to how things got to be the way they are and maybe show us how to change our destiny, as Lincoln led us to see ourselves and what America stands for. Thanks for the recommendation; I'm passing it on to all your fellow WSII readers, too.

Q: Wow, how right you are... I've read your stuff a long time now, and damn it, I wish I had said it all as you are one smart cookie with whom I seem to always agree. Are we related ? ~ Jay C.

A: Probably twin sons of different mothers, I reckon, Jay.

Q [re: Our Pension Fund Scheme is Unsustainable]: When we get into hyperinflation (which is quite likely based on history- and is the cruelest form of regressive tax) - these big pension payouts won't be worth zilch. ~ Chicken Little

A: The sky is falling... you know that, thanks for pointing it out. Someone pass me that bottle.

Q: You can outlaw the hedge funds and create laws to prevent any more banking collapses, which would make the fraud seem to be a little more out in the open. ~ Tom T.

A: Hedge funds aren't the problem, never have been. It's banks that rob us blind.

Q: Could you explain what a prop trade is and why it is illegal and its ramifications in something like a "prop trading for dummies" type of explanation? ~ Peter S.

A: Sure. "Prop" is short for proprietary. Proprietary trading is trading with the firm's money, not your own, and not a client's money who has asked you to make a trade with his money (that's an agency trade). Of course, prop trading at banks means, more often than not, your trading capital includes depositors' money. Prop trading is not illegal. The problem is that when banks prop trade, their risk-taking may result in losses that wipe out their capital and eat into their depositors' funds.

Q: I am a happily married 59 year old woman, even so, this morning I sure enjoyed looking at this picture of you, Shah. Wow, if only I could be 30 again. ~ Penny

A: Yes, I am blushing, Penny. If only I could be happily married I'd feel like 30 again myself!


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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