MF Global Bankruptcy Proves Need for Privatization of Financial Regulation

Here we go again. After all of the public outcry to rein in Wall Street, the eighth largest commodities trading firm in the United States has declared bankruptcy, three short years after the Lehman Bankruptcy.  This bankruptcy comes with a twist - $593 million of customer money is missing. The FBI, as well as the securities regulators, is now camped out the firm's headquarters. Will we ever learn?

I have been arguing for privatization of financial regulation for some time. This bankruptcy proves that we need to find a new paradigm for regulation. The regulations and regulators that we have now in place are not working. After the last financial crisis, it seems incredible that there were no rules in place to limit the leverage and concentration of trades done with firm's money. Once again, one trader has bankrupted an entire firm by taking outsized risks without any fear of a clawback of his earning.

My new paradigm for securities regulations is to empower outside lawyers, with a vote by the commissioners, with the ability to investigate securities and commodities firm, prosecute violators and pocket the fines imposed. I am working on this with the community reporting news site, Spot. us. More details here. 

Regulators are always Johnny Come Lately if they arrive at all. The CFTC did not detect the lack of controls over the segregation of client money. Exactly when MF Global clients  need his insight and wisdom the most, the head of the CFTC, Gary Gensler, has withdrawn from any involvement in the case due to his close relationship with the firm's former CEO Jon Corzine, his former boss at Goldman Sachs.  Funny, that close relationship never seemed to be a problem when Corzine was lobbying for what he wanted.

MF Global clients may lose as much as 40% of the capital in their personal accounts. Some of these losses could have prevented if regulators were paying attention,  Many institutional investors, having their ear to the ground, rushed to withdraw their money last week. A money manager in Chicago told the New York Times that his firm, hearing the rumors, pulled out $5 million last week. The CTFC gave sophisticated investors an advantage by not blocking last week's hastily arranged withdrawals. Maybe, the withdrawals can be clawed back like they are in a Ponzi scheme.

Corzine, who should have known better, was using the commodities firm, which was also a registered broker-dealer, as his own private casino. He was making huge bets, leveraged 40 to 1, on European sovereign debt with the firm's money.  If he won, he would become richer. If he lost, he would walk away as he has done.

The Financial Industry Regulatory Authority, a private organization, first raised the alarm about MF Global's risky bet. Then the panic spread. MF Global tried to sell itself to Interactive Brokers but the missing client money precluded a deal. The firm may not have been properly segregating customer money.; It  may have been using the money to shore up their under the water positions.

We might be able to write this off this speculative use of firm money as a one time incident except that Corzine and the CEOs of other commodity firms were lobbying the CTFC  to even further relax the rules surrounding commodity firms' uses of customers' money. Gensler wanted to tighten the rules, but apparently was unable to stand up to the bulldozer that is Corzine. The Republican commissioners were also against more regulation. Gensler isn't perfect. When he served in the Clinton White House, he was against additional regulation of derivatives.

The coziness of Gensler and Corzine may be unseemly but probably had very little effect on the final result. When I was at Wharton, Gensler and his twin brother were the most intelligent and best prepared students in every class I attended. If Gensler was blindsided by Corzine's actions, then probably no one could have seen it. When traders leave Wall Street and become Washington regulators, something appears to happen to them. It must be the brand of cool aid they serve in Washington.

While many treat Elizabeth Warren as a hero for dreaming up the Consumer Financial Protection Bureau, this bureau also would not have prevented the MF Global disaster.  More regulations and regulators are not the answer. Smart people in the private sector must be given tools by which they can protect the consumer. Regulators are not up to the job.

There may be one good thing to come out of the MF Global bankruptcy. While it is a commodity firm and not a bank, the bankruptcy should shore up support for the Volcker Rule, which is meant to curtail speculative investments by the banks.

Biden's Future Jewish Son-In-Law is My Doctor

What woman can resist a Jewish doctor. Apparently not, Ashley Biden, daughter of Vice President Joe Biden.I have been a big fan of Biden since I volunteered and donated to his ill-fated 1980 Presidential campaign. So you can imagine my happiness when I found out that his daughter, Ashley, was engaged to my doctor, Dr. Howard Krein.

Dr. Krein is a very nice, thorough doctor. He is part of a big ear, nose and throat practice at Jefferson Hospital. My only complaint is that he kept me waiting over an hour and did not offer any apology when he did finally see me.

The office is very automated probably due to Krein's sideline. When you enter the office, you are asked to type your name into a computer and sit down.

Howard Krein is Chief Medical Officer at OrganizedWisdom Health. His brother Steve is a serial internet entrepreneur, with Organized Wisdom being the latest. The company "helps doctors set up their digital offices in minutes." The website  boasts, "The Most Effective Way to Save Doctors Time While Creating Healthier, Happier Patients". Former Time Warner CEO Gerry Levin serves on the board of directors of the company while Internet guru Esther Dyson is on the board of advisers.

Employees of Jefferson Hospital told me that Howard is proud of being Jewish so expect some Jewish elements at the wedding. Maybe that will shut up some of Obama's Jewish critics.

While Ashley Biden is marrying outside her Catholic religion, she not marrying outside of her party. She is marrying a liberal.

Mazel Tov Howard and Ashley!

Update: I saw Dr. Krein today. He had a sense of humor about my blog posts. Ashley is a very lucky girl.

Occupy Philly Defeats Eric Cantor

House Majority Leader Eric Cantor was scheduled to speak at the Wharton School late this afternoon. His office cancelled this morning when they found out that protesters from Occupy Philly and unions would be allowed to attend.

Cantor was expected to speak about the GOP's plan for wealth redistribution or "income mobility".

Justice Breyer Riffs On The Death Penalty, Citizens United, Bush v Gore

Last week, I had a chance to hear Supreme Court Justice Stephen Breyer speak at the World Affairs Council of Philadelphia. Breyer came to discuss his most recent book, "Making Our Democracy Work: A Judge's View.

Breyer described his job this way to his son, "Being a Supreme Court Justice means doing homework for the rest of your life. It is reading and writing done in isolation. Each day, I am in front of a word processor."

He even read briefs for the cases that the court will hear in November on his way to Philadelphia by train. He joked, "Why are they called briefs since they are not brief. The average case has 12-15 amicus briefs; right to die cases have 80; affirmative action cases have 120."

In the book, Breyer criticizes the legal theory of originalism that is favored by Justice Scalia and other conservatives. While originalism believes that judicial decisions should be based on the original intent of the founding fathers, Breyer contends "Politics are not law. George Washington could not have imagined the internet. Historical values do not change but the circumstances do change. We now need computer experts not historians."

Legal differences aside, Breyer said, "Nino and I are good friends. We talk about everything like opera, baseball." The dissension on the court seems to be exaggerated. Breyer ticked off these statistics: "40% of all of the Supreme Court cases are unanimous. Only 20%-25% are 5 to 4."

According to Breyer, there is only one reason that the Supreme Court will decide to hear a case - "Whether or not, the lower court came to a different conclusion about the meaning of a federal statue. The Justices are hesitant to declare a law unconstitutional."

The judges use their "imagination" to understand how their ruling will affect a lot of people. They review a law by asking if it is "pragmatic, pertinent, workable, has purpose, and underlying reason for existence."

Breyer, who dissented from the majority, still thinks the court should not have heard Bush v Gore that installed Bush as President. "Elections are a state issue," asserted Breyer. He marveled that after the decision "the people followed the rule of law and no riots or deaths ensued after the decision. The Supreme Court is a national treasure."

Although he dissented, he defended the controversial Citizens United decision by invoking the 14th amendment. Breyer said, "The 14th amendment protects persons. Case law has deemed corporations individuals for 100 years now."

The easygoing, affable Breyer only became defensive when the subject of the death penalty was raised. "You have to understand that each death penalty case usually comes before the court three times. The average defendant is on death row for 15 years," said Breyer.

He continued, "The recanting of witnesses is often raised. That is not enough. It is necessary to have proof that someone else has had to pull the trigger. There would have to be something really wrong for the Supreme Court to hear anything significantly new that was not heard before by the lower courts. We are presented with roughly the same arguments, just at the last minute."

Breyer explained that the court can not rule on the death penalty itself or address the racial disparity of its imposition since "it is mostly imposed by state law, rarely federal law. Only the legislature can abolish the death penalty," said Breyer.

Citing the example of French President Mitterand, Breyer utilized his bully pulpit to urge the executive and legislative branches to abolish the death penalty in America. "Europe is against the death penalty now," he said. "In 1980, 2/3 of the French electorate supported the death penalty. Still Mitterand, in a television interview, came out against the death penalty. He immediately went up in the polls because he took a position of conscience. The same thing could happen here."

He doubts that abolition of the death penalty will happen. "Politicians were in the popular club in high school. They hold their finger up to the wind to measure popularity," opined Breyer. "Judges are terrible politicians."

An audience member asked him what his typical month looked like when the court was in session. Breyer answered "The first two weeks of each month from October to June, we listen to oral arguments. Tomorrow, I will talk to my law clerks about a tentative position on the cases that the court will hear in November. I read the average of twelve briefs on each case and assign each clerk three briefs to read. They answer the questions that I ask and ask their own questions."

He continued, "Next week, the judges will conference. The justices are not arguing or convincing you of their point of view instead we go back and forth on the legal reasoning that will be helpful in making a decision. Starting with Chief Justice Roberts, each judge speaks in order of seniority. Everyone has to speak once before someone can speak again."

Each judge can ask questions during the half hour of oral arguments before the court. The Chief Justice assigns someone to write the majority opinion. If Breyer is chosen to write the arguments, he and his his clerks work on it together. After it is written, the writer circulates it for signatures.

Off the court, Supreme Court Justices often entertains foreign dignitaries. The first question that supreme court justices from other lands ask is "why would anyone listen?" Breyer answers, "The word is mightier than the sword. We will follow the rule of law here."

Occupy Philly is Starting "The People's Law School"

The Occupy Philly site is currently a sea of tents. When the scheduled $50 million renovation of Dilworth Plaza is scheduled to begin in approximately three weeks, the protesters will be forced to move unless they want to face arrest. The City of Philadelphia has so far not granted permission for the protesters to move to another site. With the protest costing the city $80,000 a day in police overtime, the city is not in a hurry to issue a permit for a new site.

Occupy Philadelphia has partially become a pedagogical movement. One of the protesters, Aaron, has been arranging for speakers to inform the crowd about the issues. The schedule of events is posted on a big calendar. Last night's lecture, "Financial Inequality" was given by a Swarthmore College professor. The public relations team is offering "Harvey's Homeless Reality Tour" at 4pm daily.

Next week, Occupy Philadelphia is starting the "People's Law School". Community Legal Services lawyer Michael Froehlich, at the request of his union, will be conducting classes at 5 30pm Monday thru Thursday each week. He will start with tenant rights, but will address disability, discrimination, etc.

The protesters stood outside the main Philadelphia branch of Wells Fargo on Wednesday afternoon and chanted "Give it back" to the accompaniment of drums. The crowd, which was more racially mixed than the main protest, was objecting to a $63 million payment by the Philadelphia School District to Wells Fargo due to interest rate swaps.

Prison reform has been a focus in Philadelphia. Signs like "Prisons Are Concentration Camps for the Poor" and "$93 million for Jail Cells for Pot instead of a ticket" captures the zeitgeist.

Occupy Philly has a sub-genre, which I have named "Occupy Judaism." Rabbis from the Reconstructionist branch of Judaism, including Rabbis Julie Greenberg and Mordechai Liebling, regularly visit the site. I participated today in the ceremonial blessing over the lulav (branches) and etrog (lemon) with Rabbi Lauren, who heads a congregation in West Philadelphia. The site's Sukkah (ceremonial hut), which urges those that enter to "enjoy and respect the space," is her old Sukkah. There was a moving Kol Nidre service to commemorate the beginning of Yom Kippur.

The demonstrators include families with small children and a hunger striker. Artist RJ Smith is on Day 6 of a hunger strike. He will not feed until "Wall Street Ends the Greed". His fiancée begs, "Don't Let Wall Street Kill My Fiancé."

Among the protesters that are employed, I have noticed several in the computer field. Some of the people, who initially came out of curiosity, have been converted to protesters. Peter, the head of an IT firm, claims not to be a protester, but yet I have seen him there several times.

Gaza: Pictures From A Mediterranean Paradise

The picture to the left is of the central public library in Gaza. If it does not look familiar to you, I am not surprised. Whenever there is a story on Gaza, a picture of the squalid refugee camps is usually attached. Most people do not realize that the majority of Gaza is developed and very beautiful. I hope these pictures dispel the myth of the indigence of Gaza.

I hate to scream media bias against Israel. I just hope that you realize that the reporters that neglected to show you the presentable sections of Gaza are the same ones that tell you about the suffering of the Palestinians. Draw your own conclusions. Imagine the image of New York if all the stories featured Bedford-Stuyvesant and Brownsville instead of the Manhattan skyline, Times Square, or Wall Street.

While the plight of the Palestinian is constantly told and retold, the media talks very little about the excruciation of the Lebanese Christians at the hands of the Palestinians and other Arabs. Since the United States is a predominately Christian country, this aperture in the reporting from the Middle East seems odd.

My neighbor George, a Lebanese Christian from the southern town of Sarba (near Saida), reminded me "the Palestinians were willing to leave Gaza in the late sixties and early seventies and resettle in Lebanon." During the long war between the Palestinians and Lebanese, the Palestinians killed 20 of his relatives. Some members of his family were murdered at a family funeral to mourn the original members of the clan that had been killed by the Palestinians. George can not go back to his family home because the Palestinians have stolen it from them.

Occupy Phillly Pictures Day 2

The overnight crowds were buoyed by a surprise visit from Philadelphia Mayor Nutter at 1 30 am last night. Protesters urged him to "Stop Nutting on Us" and begged him not to be Mayor Bloomberg, the billionaire who criticizes the poor. "Let Freedom Ring," a complaint that the Eagles football team manufactures their memorabilia in China, and protesters in Philly shirts added a Philadelphia touch to the protest.

On the second day, the crowds were thinned out, but were hardcore. The group, who are extremely well organized are still determined to effectuate change. The most thoughtful slogan was "Tax the Rich, They Lose a Yacht, Tax Me, I Lose my Home." Republican presidential candidate Mitt Romney was singled out for attention. The protests in Philadelphia are more anti-Fed than anti-Wall Street. Think "Skank America." Healthcare is a major focal point of the protests. "Cancer Is Not A Business" reflected many of the demonstrators sentiments.