Trust. How can Wall Street firms regain the trust they lost from the long list of scandals that have arisen in recent years without any effective response from President Obama's Justice Department? Better yet, how can the U.S. government regain the trust it has lost as a consequence of its unwillingness to pursue clear indications of fraud where high ranking politicos with close connections to the government that is supposed to be on the investors' side in such cases might be involved?
In the wake of scandals like MF Global, where literally millions of dollars in the company's investors' accounts were drained without the consent of the account holders at the discretion of prominent Democratic party fundraiser and former governor of New Jersey John Corzine, the lack of an effective response to date from President Obama's Securities and Exchange Commission, Federal Bureau of Investigation, or other federal law enforcement agency to the known facts of the scandal has done little to restore the trust of investors.
Worse, it seems like the wrongdoers are being given a free pass - a get out of jail free card - provided they have certain political connections. Under those kind of conditions, there's no way that anyone can reasonably trust the system in which Wall Street is trying to work today.
That has consequences, as the real needs of millions of people cannot be met efficiently if that system cannot be trusted, as potential investors either hold back or have to devote significant efforts to scrutinizing the firms with whom they do business to ensure the integrity of their investments are not at risk of being lost to fraud or other bad behavior. Markets, whether on Wall Street or Main Street, need trust to work, and a high level of trust among nearly all participants to really reach their full potential.
So what if, instead of relying upon the whims of a government that appears to take political affiliations into account in determining whether or not it might pursue criminal prosecutions, we used a market mechanism instead to protect investors from fraud? Chris Whalen recently discussed an old idea that we find especially intriguing:
Equity receivers have been around for a long time and have been very effective at combating fraud in their limited applications in recent history. We believe that taking steps now to make their role and visibility more prominent will go a very long way toward rebuilding the trust that Wall Street needs to reach its potential.
The alternative would be to continue weighting down the markets with more and more regulations that keep it far away from being able to achieve its potential, but somehow, never seem to affect the money-making schemes or personal pocketbooks of the crooked and politically-connected.