In No One We Trust

31 Oct

The one year anniversary of the MF Global collapse has arrived, and to no one’s real surprise we have yet to see the appropriate perp walks. No one should view what has happened with MF Global or Lehman or the U.S. banking system over the past several years as one off events. Self regulation and self aggrandizement has not only become the way of doing business in the U.S., it has become institutionalized. The regulatory system is lobbied and manipulated by those that benefit, with  no one on on the regulatory side held even slightly accountable. Our hope is that the system will become more and more frictionless and that the profits that accrue to the friction inherent in the system will diminish. The profits we are referring to, involve those riskless profits that have flowed to those in the futures industry, banking industry, and brokerage industry purely as a result of holding client funds. As professional investors, we have always understood the many conflicts of interest that exist within the industry, and have always sought to make sure that myself and my firm were never in a position to be exploited by such conflicts. In spite of our understanding of said conflicts, we always maintained a belief that the system itself worked. In light of the events with MF Global, we no longer hold those same beliefs.
As with all crisis, there must be a teachable moment, something tangible which prudent investors can take away. The teachable moment from the knock on crisis that we have experienced from 2008 onward, is that investors functioning in U.S. Financial Markets should approach each and every interaction with said markets with a high degree of distrust. Distrust the regulators because they are tainted and ineffective with no sense of accountability. Distrust the “fiduciaries” holding your assets because they undoubtedly have pressed the regulators in order to extract more economic rent than warranted from holding your assets (Heads I win Tails you lose)

Hopefully, as more and more investors push back, particularly on the institutional side, against these frictionless profits they will decline dramatically.  Perhaps then, and only then, will we have real change.

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