Capitalism is Far from Dead, Despite Scandals
Cheryl is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Capitalism has been taking a big hit lately.
Iowa-based futures trader Peregrine Financial Group Inc., which operates PFGBest, just filed for bankruptcy after two national industry watchdogs, the Commodity Futures Trading Commission and the National Futures Association, alleged fraud over $200 million in missing customer accounts. Peregrine owner Russell Wasendorf, meanwhile, faces charges of misappropriating these funds for more than two years and for falsifying records. He was reportedly arrested and charged with making false statements at the hospital where he was recovering from a suicide attempt, according to a July 13 story from CNBC.
The PFGBest case mirrors MF Global Holdings Ltd., in that a ‘where’s the money’ theme permeates. MF Global, a scandal of epic enough proportions that it lasted through months of media cycles, involved dramatically higher dollar amounts; however, at last count during bankruptcy and liquidation proceedings the net loss to clients was around $1.6 billion.
Then came Barclays (NYSE: BCS) and the quick lesson on Libor; no longer to be confused with lemur. Libor, of course, stands for London Interbank Offered Rate, and is used as the global benchmark for interest rates. At least it was, until some of the financial geniuses (insert ‘Barclays employees’ here) in charge of setting this rate decided to run a con and created artificial rates. Given that more than $10 trillion – yes, that’s trillion with a ‘T’ – of loans are tied to Libor with rates impacting millions in the market to buy cars and homes, access credit cards or take out student loans. Suffice it to say the scandal may be characterized, in most appropriate British accent, as rather large. If that doesn’t depict it properly, here’s another apt comparison: it’s like the shot heard ‘round the world.'
English humor is soooo funny
Anyway, let the lawsuits begin. The Commodity Futures Trading Commission found Barclays could hardly have worked its scheme alone, and now more than a dozen banks are under investigation. So while Barclays is settling, other defendants are emerging. So, too, are the claimants. From companies like Charles Schwab (NYSE: SCHW) to individual investors to the city of Baltimore – it’s a diverse bunch that nonetheless found common ground in the allegation that Barclays and purported partners infringed on profits from securities due to artificially suppressed rates. So who else is under the spotlight?
Firms like “Deutsche Bank, Royal Bank of Scotland (NYSE: RBS), Credit Suisse, Citigroup (NYSE: C), UBS, and JPMorgan Chase (NYSE: JPM) have all disclosed that they are being investigated,” reports CNN Monday on July 10. Citigroup fell slightly in per-share price to $26.80 on Tuesday, July 17, while company executives confirmed in a conference call they are cooperating fully with investigators. Royal Bank of Scotland, meanwhile, fell overnight from July 16-July 17 $204.50 to $203.30. The price drop continued as the morning progressed, at the same time executives fought turning over documents related to the Libor scandal to Canadian authorities, according to a New York Times report. And trading losses for JPMorgan, down on Tuesday by more than a percentage point to the $34 range, continue to mount. Chief executive Jamie Dimon said most recently that estimated multi-billion-dollar losses could actually double in the coming quarters. Underscoring the prediction was Friday the 13: That's when JP Morgan stated a surprise loss of $4.4 billion due to bad trades.
Cue ‘caveat emptor’ card. But for those already invested, might a picture of a mattress make more sense? In view of recent events, it can’t be that bad a place to stash cash.
Still, before losing heart, it might be helpful to remember a key principle that's frequently cited during Second Amendment debates: Guns don't kill people. People kill people. Likewise, money doesn't cause scandal. People cause scandal. And specifically, greedy people cause financial scandal.
Rigging the market is a dramatic crime with far-reaching effects, no doubt. But perhaps a teachable moment has arrived.
“Who trusts a banker at this point? The collateral damage is enormous,” writes Simon Johnson, in the New York Times, July 12. “Who in their right mind would buy a complex derivative product from Barclays or anyone else implicated in this growing scandal?”
If a sound investor is a smart and informed investor, then it would seem we’ve all been handed a brass ring.
ckchumley has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and Charles Schwab. Motley Fool newsletter services recommend Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.