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EU Banking Supervision?

I love how Wolfgang Schauble, the German Finance Minister, puts two effectively contradictory statements right next to each other in his FT op-ed:

It is crucial that the new system be truly effective, not just a façade. We must eschew yesterday’s light-touch approach for good and endow this supervisor with real and clearly defined responsibilities, coercive powers and adequate resources.

This also means that it should focus its direct oversight on those banks that can pose a systemic risk at a European level. This is not just in line with the tested principle of subsidiarity. It is also common sense; we cannot expect a European watchdog to supervise directly all of the region’s lenders – 6,000 in the eurozone alone – effectively.

Is a regulator really effective if some institutions remain outside its scope? Hasn’t that been one of the fundamental failings over the past 20 years that led to the financial meltdown in the first place?

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High Speed High Stakes

Also known as how the big Wall Street firms are like casinos.

The NY Times today had an article out today that coincidentally jives with a story I heard earlier this week from someone I work with.  Wall Street trading desks have essentially figured out how to determine what buy and sell decisions investors are making in the markets BEFORE those trades are executed and trade against them, allowing the firms to reap huge profits at the expense of regular investors.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom…The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices.

The result?  The high-frequency traders ripped off the regular investors for $7,800 on $1.4 million in trades.  As a %, not a lot, but if this happens EVERY day on EVERY trade, it adds up to billions.  All because some large financial institutions have access to your orders before everyone else does, so they can bet against you to steal your money.

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Brilliant – Forget This Value Thingy

CNN has a fun article up about how some people believe the concept of “mark to market”, which states that companies have to report the value of their assets as though they would be sold today (i.e. the market value), is behind the financial crisis.  Specifically, that because companies have to mark down the value of the mortgage-backed securities they own since the market value has collapsed, they can no longer afford to lend because they cannot maintain adequate capital ratios.

“The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market,” said William Isaac, a former chairman of the FDIC.

I love the inherent contradiction in the line above. That mortgage backed securities should not be valued at their market value since there is no market, which is largely because they are considered worthless.