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WHEN IS THE PUBLIC OUTRAGE GOING TO TRANSCEND PARTY LINES AND IDEOLOGY? WHEN WILL WE BREAK UP THE BANK OLIGOPOLY THAT HAS US IN A DEATH GRIP OF FINANCIAL SLAVERY. WHY DO WE VOTE FOR THESE PEOPLE? AS PJ O’ROURKE SAYS, IT ONLY ENCOURAGES THEM. ARE WE SO SCARED OF THE UNKNOWN THAT WE ACTUALLY PREFER CERTAIN DEATH?

Anyone counting on pension benefits had better watch more closely what is going on and who is pouring money into this mid-term election. If you follow the money, there won’t be any money left for anyone except those 1,000 people or so who control the system and own the legislators through anonymous contributions. The plans afoot are nothing less than draconian — leaving all those who thought they were voting to conserve our resources in finance and to maintain their freedom from government intervention with a result that they cannot conceive will happen — not in our country! Right?

For those of you who missed it, I posted an article and comment recently on the “loaning” of securities to the same investors (pension Funds etc.) who were defrauded out of trillions of dollars when they bought non-existent mortgage backed bonds. Although you can place the blame on Wall Street for a lack of conscience, the fix can only come from proper regulation and the requirement of transparency. It shouldn’t be allowed to hide the probable losses on an investment. In fact, it isn’t allowed. But the culture grew starting in the 1980’s and speeding up in the 19990’s and then went on steroids from 2001 to the present day. In lending the securities, to make it simple, it was a heads “we” win, tails “You” lose situation and the pension funds lost hundreds of millions of dollars again, thus reducing their capacity to fulfill their pension obligations. Needless to say there were losses and the losses were magnified by the bets placed against these investments by the investment banks that sold them in the first place. Sound familiar?

The trading continues in MBS, securities lending, and a multitude of “synthetic” financial products that multiply the effects of these losses. Wall Street has found the ultimate pot of gold — a source of cash that doesn’t have the ability to analyze complex and heterogeneous financial products (which as James Kwak,  baseline Scenario points out corroborating my articles on this very topic three years ago)  makes it impossible to arrive at an objective price or assessment of the security, and because all of them are different makes it impossible to use comparable investments to test the price validity. They combine this hodge-podge mixture into a pot where the rules are, the investment loses value. Since the banker already knows that he can place ‘bets” (implying a non-existent risk) against the investment. So the pension fund loses money, the bank makes a fee for selling it and then a profit on the loss that the pension fund just ate.

The Bank Wins …

The Dodd-Frank financial reform law is supposed to correct the problems and abuses that led to the crisis. It could take years to implement. Meanwhile, Wall Street is still engaged in many of the same practices. That was abundantly clear in Louise Story’s article in The Times this week on securities lending, a multitrillion-dollar activity, both before the crash and today.

In a typical securities lending deal, a pension fund, or other institutional investor, lets a bank lend some stocks to another investor, say, a hedge fund. (Investors use borrowed shares to “short” or bet against stocks.) In return, the hedge fund puts up a cash deposit. The pension fund then allows the bank to invest the cash, in presumably safe investments to eke out a little extra return.

Here’s where things can get tricky. If the invested cash turns a profit, the deposit is easily repaid when the shares are returned, and the pension fund and the bank share in the gains. If the invested cash incurs losses, however, the deposit cannot be repaid in full, and the pension fund has to cover the shortfall.

Securities lending gone bad contributed to the implosion of the American International Group in 2008. Separately, Ms. Story reported that clients at JPMorgan Chase — including pension funds of New York State and the City of New Orleans — have ended up owing the bank more than $500 million to cover losses. JPMorgan shielded itself from some of the investments that hurt its clients — pulling out of one investment vehicle before it collapsed while clients with money in the deal lost millions of dollars. It also kept the profits from before the trades went south.

Several pension funds and foundations have brought cases against various banks in state courts, saying they were not warned of the risks and that the banks failed to act in the customers’ best interest. The banks say they acted appropriately and intend to fight the suits.

The Dodd-Frank law has directed the Securities and Exchange Commission to write new rules for securities lending, but has given the agency two years to act. The S.E.C. needs to move faster. If it needs more resources, Congress should provide them.

The S.E.C. needs to improve transparency and disclosure in securities lending. It needs to curb all potential conflicts of interest — among banks, brokers and other intermediaries. Done right, such rules could help reform securities lending. They could also begin to alter the norms of bank conduct, aptly described by Ms. Story as “ heads, we win together. Tails, you lose — alone.”

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