What About Ethics?

Senate Banking Chairman Christopher Dodd is all set to put his latest banking regulation bill up for a vote. The bill would put an end to proprietary trading, lend transparency to hedge fund trading and derivatives, and give the Federal Reserve the power break up companies if they pose a “grave threat” to the economy.   


Dodd’s proposal would also create a nine-member “Financial Stability Oversight Council” of regulators, led by the Treasury Secretary. According to Bloomberg, “…the council can make recommendations to the Fed to impose “strict” rules for capital, leverage, liquidity and risk management to make it difficult for firms to grow so big and complex that they endanger the financial system. It could require the Fed to regulate non-bank financial firms that threaten financial stability, ensuring that “the next AIG would be regulated” by the Fed…”   


It’s clear what Dodd is trying to accomplish here. He’s trying to make it so that financial firms can’t engage in trading activities that could ultimately destabilize the entire economy. I’m not sure these proposals, as I understand them, accomplish the objective.   


It seems to me that, once again, it was fraud and outright lying that led to the financial crisis. The ability of investment banks to create mortgage-backed securities that were created using both prime and sub-prime mortgages, and then sold as AAA rated investments was deliberately deceitful.   


It seems to me that the dollar amount of credit default swaps that AIG wrote was deliberately concealed. After all, if you guarantee more than you can possibly pay, there’s something wrong.   


It seems to me that the accounting rules that allowed Lehman Brothers to simply remove $50 billion in impaired assets from its balance sheet encouraged fraud. And statements by former Lehman CEO Richard Fuld that everything was A-OK at the company were lies.   


In civil law, there are laws that try and address ethical behavior, like reckless endangerment, depraved indifference and even manslaughter. It seems to me that we need some ethics rules for Wall Street, too. And this is where all of the financial regulation proposals I’ve seen fall short.   


I know, you’re probably thinking we’ll sooner see pigs fly than ethics rules for Wall Street. But in my opinion, some serious consequences for behavior that’s deemed unethical would help. Or it might help.   


As I told you last week, TradeMaster Daily Stock Alerts Jason Cimpl is out in California, attending the Roth Capital Growth Conference. Jason sent me the following this morning:   


The Roth conference is in full swing and thus far I have been impressed with the positive outlook for business spending and the benefits from cost management during the slowdown. Everyone in the media barks about consumer spending trends because that is a large part of GDP. While the consumer is important so are businesses.    


Spending among businesses is a strong sign of economic stability. If business spending is increasing, which is what I am hearing a lot of from CFOs, that means economic growth is more likely to persist.   


Yesterday I focused on business software providers. This group is slaughtered during recessions as businesses protect capital. We know business spending in this industry has picked up, just look at revenue growth, but is it going to remain? All signs point to yes.   


That’s a great insight from Jason. Because it helps explain the seeming disconnect between the stock market and consumer spending/unemployment. Consumer spending is a headline number. But the consumer is also fickle, as we’ve seen in consumer confidence numbers.   


Businesses are far more reliable. And if businesses are spending money, then the economy is on more solid footing than it might appear from consumer numbers.  


Jason also reports that he’s seen at least one company presentation that “made his jaw drop.” That’s Jason-speak for he’s found what should be a big winner for his TradeMaster Daily Stock Alerts readers.


I still think $2.80 looks like a good target for Maguire Properties (NYSE:MPG) before earnings next Tuesday. I will keep you posted in the coming days.  

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