Monday, March 23, 2009

Where should we start to investigate so we can fix the stock market?

Let me start with just one situation that may have taken billions of dollars out of our pockets and somehow disappeared down a rabbit hole in the last years. It a long story and this is just one of many that all contributed to the demise of our hard earned money.

The DTCC is one of the organizations that are supposed to keep the markets oiled and moving. It facilitates and acts as an intermediary in the transactions of security’s and settles disagreements in those transactions as an unbiased broker. Form their own website:

“DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks.

DTCC's depository provides custody and asset servicing for 3.5 million securities issues from the United States and 110 other countries and territories, valued at $28 trillion. In 2008, DTCC settled more than $1.88 quadrillion in securities transactions.”
One major problem here is that no one seems to regulate them!

The Congressional Research Service, a Library of Congress think-tank with a single client: Congress. A member of Congress requests a study on a subject of interest, and CRS researchers produce it. The CRS is one of the most respected institutions in Washington, DC, and its reports are universally considered non-partisan, objective, and thorough.

On February 24, 2009, the Congressional Research Service published a 40 page report, “Who Regulates Whom? An Overview of U.S. Financial Supervision” (Mark Jickling, Edward Murphy, CRS, February 24, 2009) as the title suggests, the report is a primer on the parts of the US financial system, and who regulates what part. The Summary section from that report says this:
“A number of financial markets are unregulated, including some of the largest. No federal agency has jurisdiction over trading in foreign exchange or U.S. Treasury securities; nonbank lenders fall outside the regulatory umbrella; and hedge funds, private equity firms, and venture capital investors are largely unregulated. (although their transactions in securities and derivatives markets may be)

This report provides an overview of current U.S. financial regulation: which agencies are responsible for which institutions and markets, and what kinds of authority they have….This report does not attempt to analyze the strengths and weaknesses of the U.S. regulatory system. Rather, it provides a description of the current system, to aid in the evaluation of reform proposals.”

If you want to know exactly who is responsible for what this is a great place to start. This report is invaluable to really figure what needs to be changed, along with the real changes that need to be addressed by Congress to make sure that the marketplace can’t be ruined, like it has been in the last few years. We should all be asking our representatives if they have been reading it and if they understand it. They certainly need to if they want to fix what’s wrong in the system. But there are some holes in the system, one of those being the lack of any regulation or oversight of DTCC that are not addressed in this study.

Why is this so important and how does this play into the collapse of the market?
Well since DTCC brokers the deals, they see the moves in the market. They should be able to tell when someone is cooking the books and when transactions are taking place that are phantoms. It is truly the first place to start the investigative process to figure out where all this money has gone and who has it.

There will be many more installments on this subject that I will be writing over the course of the next few months, stay tuned!

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