Is Financial Fraud Too Complex to Prosecute?

William K. Black, Guest Blogger

This interview with William K. Black (University of Missouri-Kansas City) appeared originally at The Real News Network. Prof. Black describes why the U.S. Department of Justice has failed to prosecute executives at financial institutions that helped to detonate the recent crisis. It is not, Black argues, that the bankers were engaged in “rocket science” too complex to prosecute, but that the lack of prosecutions is “a matter of will and a matter of ideology.” His writings on this and other subjects can be read at New Economic Perspectives.

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Understanding China's Stock Market, Post-Alibaba

Sara Hsu

Recently, Chinese e-commerce giant Alibaba officially listed on the New York Stock Exchange in the United States, and not on the Shenzhen or Shanghai stock exchanges in mainland China, to the chagrin of many yield-seeking Chinese citizens. As Alibaba’s listing underscores, China’s domestic stock exchanges remain unappealing IPO destinations. Why? Excessive listing rules and procedures, coupled with inadequate supervision and a significant presence of fraud and insider trading, have rendered the Chinese stock markets a second-best choice for competitive and innovative companies. But there’s potential for it to become a more attractive option for companies like Alibaba.

China’s stock market is the third largest in the world by market capitalization, weighing in at $3.7 trillion in 2013. However, despite recent reform proposals for a streamlined registration-based listing system that would allow companies that meet criteria for making a public offering (instead of the current system in which the China Securities Regulatory Commission approves IPOs), China’s stock market remains one of the poorest-performing in the world. This can be seen in the MSCI Index, calculated by Morgan Stanley, and even in the Shanghai Composite Index.

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Understanding China’s Stock Market, Post-Alibaba

Sara Hsu

Recently, Chinese e-commerce giant Alibaba officially listed on the New York Stock Exchange in the United States, and not on the Shenzhen or Shanghai stock exchanges in mainland China, to the chagrin of many yield-seeking Chinese citizens. As Alibaba’s listing underscores, China’s domestic stock exchanges remain unappealing IPO destinations. Why? Excessive listing rules and procedures, coupled with inadequate supervision and a significant presence of fraud and insider trading, have rendered the Chinese stock markets a second-best choice for competitive and innovative companies. But there’s potential for it to become a more attractive option for companies like Alibaba.

China’s stock market is the third largest in the world by market capitalization, weighing in at $3.7 trillion in 2013. However, despite recent reform proposals for a streamlined registration-based listing system that would allow companies that meet criteria for making a public offering (instead of the current system in which the China Securities Regulatory Commission approves IPOs), China’s stock market remains one of the poorest-performing in the world. This can be seen in the MSCI Index, calculated by Morgan Stanley, and even in the Shanghai Composite Index.

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G20 Finance Ministers Cannot Hide Failure to Tackle Major Issues

By Jesse Griffiths, Guest Blogger

Jesse Griffiths is the director of Eurodad, European Network on Debt and Development.

The communiqué from this weekend’s G20 finance ministers’ meeting in Cairns tried to paper over increasingly evident cracks in the global economy, trumpeted an OECD initiative to reduce tax dodging which is not as good as it seems, continued to focus on privately funded infrastructure, and suggested G20 impotence in tackling big problems including too-big-to-fail banks and global governance reform.

The global economy: fragile and faltering

The G20 cannot hide the continued high levels of fragility, huge unemployment, and glaring inequality that continue to characterise the global economic situation. The finance ministers’ communiqué notes that, “the global economy still faces persistent weaknesses in demand, and supply side constraints hamper growth.” Recent reports that companies are buying their own stocks at record rates, helping stock market bubbles build rather than investing for future growth, is one reason the ministers “are mindful of the potential for a build-up of excessive risk in financial markets,” though they promise no new measures to tackle this.

Instead, their response has been to trumpet the promise they made in Sydney earlier in the year to “develop new measures that aim to lift our collective GDP by more than 2 per cent by 2018.” They get the seal of approval from the IMF and OECD’s “preliminary analysis, ” which, at three pages long, has so little detail it is impossible to assess its accuracy. Interestingly, according to the crystal ball gazing that inevitably characterises such attempts to assess global impacts of national policy changes, “product market reforms aimed at increasing productivity are the largest contributor to raising GDP,” which appears to largely mean changes in trade policies in emerging markets. The next biggest impact comes from public infrastructure investment commitments – highlighting the problems with the G20’s focus on private investments in infrastructure, discussed below.

Brief reference is made to the problem that dominated the G20 Finance Ministers’ meeting in February: developing countries’ concern about how the gradual ending of quantitative easing and possible future rises in interest rates in the developed world will affect capital inflows and outflows, which can create huge problems for them. The rich countries that dominate the G20 cannot offer more than the promise to be “mindful of the impacts on the global economy as [monetary] policy settings are recalibrated.”

Despite the fact that Argentina – currently fighting a rearguard action to prevent a US court ruling from undermining a decade of debt restructuring – has a seat on the G20, the issue of permanent mechanisms to deal with debt crises continues to be off the table. Instead it was picked up by the UN, which passed a resolution in September to negotiate a “multilateral legal framework for sovereign debt restructuring,” which could be a game changer for how sovereign debts are managed, offering the possibility of preventing and resolving debt crises: a consistent plague for many countries and a huge problem for the global economy.

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New Climate Bill Would “Shrink Government,” Reward Taxpayers

James K. Boyce

Regular Triple Crisis contributor James K. Boyce, director of the Program on Development, Peacebuilding, and the Environment at the Political Economy Research Institute (PERI) and Professor of Economics at the University of Massachusetts-Amherst, addresses a new “cap-and-dividend” climate bill before the United States congress. This interview originally appeared at The Real News Network. Prof. Boyce’s detailed views on climate policy appeared earlier, in five parts, on Triple Crisis and its sister publication Dollars & Sense. It is available in full here.

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New Climate Bill Would "Shrink Government," Reward Taxpayers

James K. Boyce

Regular Triple Crisis contributor James K. Boyce, director of the Program on Development, Peacebuilding, and the Environment at the Political Economy Research Institute (PERI) and Professor of Economics at the University of Massachusetts-Amherst, addresses a new “cap-and-dividend” climate bill before the United States congress. This interview originally appeared at The Real News Network. Prof. Boyce’s detailed views on climate policy appeared earlier, in five parts, on Triple Crisis and its sister publication Dollars & Sense. It is available in full here.

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U.S. Financial Reform Law Still Not Fully Implemented

Anton Woronczuk of The Real News Network interviews regular Triple Crisis contributor Gerald Epstein, co-director of the Political Economy Research Institute (PERI) and professor of economics at the University of Massachusetts. Epstein argues that, on the fourth anniversary of the passage of the Dodd-Frank financial reform law, which was intended to rein in certain kinds of risky financial practices, implementation is going “much more slowly than one would have hoped.” The United States will need both a more complete implementation of Dodd-Frank and more far reaching regulation, Epstein concludes, to prevent the kinds of financial risk-taking that detonated the global economic crisis.

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Financial Interconnectedness and Systemic Risk: The Fed’s FR Y-15

Nikhil Rao, Juan Montecino, and Gerald Epstein

At the onset of the global financial crisis, many financial institutions that engaged in risky practices were on the verge of bankruptcy as the housing market crashed. Top regulators soon discovered that shocks suffered by large banks spread quickly throughout the financial system and then to the whole economy. Those large firms, colloquially dubbed “too big to fail,” were also highly interconnected. Jane D’Arista, James Crotty, and a few other economists had identified these inter-connections, but most economists and policy makers had remained clueless.

As the crisis worsened, Fed Chairman Ben Bernanke, New York Fed President Timothy Geithner and others tried to come to grips with what was happening. They started referring to Citibank, Bank of America, Goldman Sachs and other banks as “systemically important,” though former regulator Bill Black more aptly referred to them as “systemically dangerous”. A systemically important/dangerous institution is one that is so large and well-connected to other firms that shocks it suffers are transmitted to many other participants in that system. When these systemically important firms were failing, taxpayers bore the brunt of the impact as the government was compelled to inject massive amounts of taxpayer funds, or face massive economic losses, damages, and inefficiencies. This, of course, gave rise to the now well-known problem of moral hazard, where actors that do not directly bear the costs of risks are incentivized to pile on more risk. Taking into account the potential effects of systemically important firms, it is easy to understand why they can be closely associated with institutions that are “too big to fail.”

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Financial Interconnectedness and Systemic Risk: The Fed's FR Y-15

Nikhil Rao, Juan Montecino, and Gerald Epstein

At the onset of the global financial crisis, many financial institutions that engaged in risky practices were on the verge of bankruptcy as the housing market crashed. Top regulators soon discovered that shocks suffered by large banks spread quickly throughout the financial system and then to the whole economy. Those large firms, colloquially dubbed “too big to fail,” were also highly interconnected. Jane D’Arista, James Crotty, and a few other economists had identified these inter-connections, but most economists and policy makers had remained clueless.

As the crisis worsened, Fed Chairman Ben Bernanke, New York Fed President Timothy Geithner and others tried to come to grips with what was happening. They started referring to Citibank, Bank of America, Goldman Sachs and other banks as “systemically important,” though former regulator Bill Black more aptly referred to them as “systemically dangerous”. A systemically important/dangerous institution is one that is so large and well-connected to other firms that shocks it suffers are transmitted to many other participants in that system. When these systemically important firms were failing, taxpayers bore the brunt of the impact as the government was compelled to inject massive amounts of taxpayer funds, or face massive economic losses, damages, and inefficiencies. This, of course, gave rise to the now well-known problem of moral hazard, where actors that do not directly bear the costs of risks are incentivized to pile on more risk. Taking into account the potential effects of systemically important firms, it is easy to understand why they can be closely associated with institutions that are “too big to fail.”

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Locking Out Financial Regulation

Jayati Ghosh

The world of international trade negotiators is an increasingly secret one,    with even other agencies of national governments not fully aware of what is being offered by their negotiators in such deals. One current example is a pending “trade” deal called the Trade in Services Agreement (TISA), which is being negotiated among 50 countries, including the United States, the EU, Australia, Canada, Chile, Costa Rica, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Panama, Peru, South Korea, and Switzerland. This agreement is apparently supposed to be “classified” information – in other words, secret and unknown to the public that will be affected by it – for a full five years after it is enters into force or the negotiations are terminated!

That an international treaty that has binding and enforceable obligations can be treated as secret for five years after it comes into force is not only bizarre but almost unthinkable. The need for such secrecy would be inexplicable even if such agreements were actually in the interests of people whose governments are involved in such negotiations. That secrecy is sought would on its own be reason for concern, but the little that has been leaked out of the state of the negotiations suggests even more reasons for alarm, especially because such a deal would have far-reaching implications for financial stability and adversely affect everyone in the world.

One critical element of this relates to liberalisation of rules around financial services, discussed in an Annexe. An April 2014 draft of this Annexe is now available on Wikileaks in yet another important public service provided by this organisation. This draft may have been already superseded by the ongoing negotiations, which are apparently to continue in Geneva in the last week of June, but if it is an indication of what is under way then it deserves to arouse much more public outcry.

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