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MAKING CENTS OUT OF THE NEWS
Blog #36
(September 17th, 2009)
OUR FINANCIAL SYSTEM: WALKING THE FINE LINE TOWARDS A “FIX”
By Tom McAllister, CFP®
Reining in a horse gone wild without harming or unseating the rider - that might be a good description of the job facing Congress these days when it comes to the country’s financial system.
There are signs everywhere that Americans do not wish a return to “business as usual” on Wall Street. Emblematic of our times is Marcus Schrenker, brought back to Indiana this week to face charges concerning breach of clients’ trust in his money management and insurance dealings. Schrenker remains in the Hamilton Country jail (the very country where I reside). As he awaits trial here, he is serving a four year sentence imposed by a federal judge for his acts in crashing his plane in Florida in an attempt to simulate his own death.
At the very same time the mini-drama of Schrenker’s return to Indiana was unfolding, President Obama was paying a personal visit to Wall Street to warn the financial community to expect significant reform when it comes to government regulation of our financial system.
Will Wall Street listen and obey? Clearly there is a temptation to return to practices that are immensely profitable in the short term. These very practices, as we have learned to our chagrin, can cause immense damage in the long term. So, I believe, far-ranging reforms are indeed necessary to control the powerful corporations and the powerful temptations that motivate their executives.
History shows, in fact, that Wall Street excesses have primarily emanated from a handful of large firms, mostly publicly held, pushing for short-term profits. The system itself is built to reward this year’s or even this quarter’s results, rather than focusing on long-range benefits to the company and the economy. With “gifted“ traders glorified, and astronomical executive salaries and bonuses de rigeur, the sad results were laughably predictable. No one’s laughing now. All these “built-in” system flaws must now be rooted out and the old models “recalled”.
Previous attempts by Congress have gotten things wrong on a gigantic scale. The Sarbanes-Oxley Act earlier this decade, meant to reform public firms’ financial reporting, was cobbled together as a reaction to Enron’s wrongdoing. Rather than focusing on a handful of companies who were violating the law, Sarbanes-Oxley imposed excess accounting fees, compliance requirements, and even criminal penalties for CEO’s whose underlings violated the new rules. We in the investment business were hit with dozens of new “procedures” to protect against practices rarely found in our ranks. It is obvious to all who have endured the recession that widespread imposition of procedures did not suffice to protect us from disaster.
The challenge facing Congress now is to avoid reactive, sweeping legislative reforms that can further hurt the economy and financial services industry nationwide. I am less than optimistic about the new reform movement, as I watch Wall Street lobbyists hard at work to tilt things in favor of their respective constituents.
What can and should you readers do? At most, we can petition our own Congressmen and Senators, asking them to research the topic and to speak out against “chopping down the forests to avoid forest fires”. In the meantime, let me again warn you to invest funds only in accounts which fit the following parameters:
· Your accounts can be accessed 24/7 on the Internet
· Your funds are held in SIPIC (Securities Investors Protected Insurance Corporation)
protected Accounts
· Your accounts are with large, well-known custodians or bank trust departments.
· Your broker or manager must have no access to your funds, with the exception of the
agreed-upon monthly or quarterly fees, which are paid out per your written
instructions by the custodians.
In his talk this week, President Obama reminded the financial community that it was their past behavior which caused the global recession. He reminded listeners that the U.S. government had come to the rescue of many of their firms in order to save the system from collapse. Finally, the president emphasized, financial reform must constitute a near-term priority for our country. While I believe that is most certainly the case, like Goldilocks, I’m hoping that reform will not be “too hot” or “too cold”, but “just right”!
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