But there is a solution – one so simple that if effectively implemented, market volatility will ease and investing will be more rewarding than day trading.
It could be dressed up in a lot of different ways, but ultimately it comes down to two things: transparency and uniformity.
We need transparency in the financial markets. After all, the murkiness of the derivatives market and other complex financial innovations played a crucial role in bringing down the entire global economy in the first place.
Nothing is workable if it’s not transparent. Transparency has to be at the root of every resolution, of every solution, and in the construction of every fix to every issue.
Keep that in mind, because a lack of transparency is currently what’s missing and what continues to hamper any workable solution to the problems we’ve been trying to tackle.
Specifically, when it comes to banks and capital markets, it’s the lack of transparency that got us into the mess in the first place, and only by hammering ineluctable transparency back into our financial system can we ever climb out of our deepening hole.
We need transparent, globally agreed-to and enforced financial accounting standards and transparent, globally agreed-to and enforced bank capital requirements and regulations.
Transparency and Uniformity
The good news is we’re already taking steps to fulfilling these two critical goals.
The Securities and Exchange Commission (SEC) has promised that by the end of this month it’ll decide on whether U.S. companies will be able to abandon Generally Accepted Accounting Principles (GAAP) for International Financial Reporting Standards (IFRS).
Right now, most Group of 20 (G20) nations embrace IFRS, which are standards drawn up by the International Accounting Standards Board. But in the United States, most companies, including banks, use GAAP accounting mandated by the Financial Accounting Standards Board (FASB).
FASB rules have been the predominant set of standards adhered to in the United States since 1973. The FASB is overseen by the SEC, which has final authority over listed companies’ accounting rules but defers to the FASB almost all the time.
It’s not worth arguing about variations between the two sets of standards. All that matters is that we have one set of accounting rules for every person, every company — and especially every bank.
Of course, those rules should make transparency their number one goal. We need to agree on exactly how to account for derivatives and counterparty risk. We need to agree on how to risk-weight assets, and how to mark them and every other attendant accounting rule vital to transparency and gives regulators, analysts, and investors an apples to apples comparison of companies – especially banks.
Second, we need one uniform set of bank capital requirements and measures.
The good news is that the Bank for International Settlements (sort of the central bank for central banks) has been convening meetings in Basel, Switzerland for years. From those meetings have come what the world knows generally as the Basel Accords, or Basel Agreements.
Again, there’s plenty to argue about when it comes to what capital requirements should be, how to make any of the necessary measurements attendant to calculating them correctly, or who may or may not benefit by them. But, that’s not the point. Those things can and will get worked out through tough negotiations.
The point is that we need a singular set of rules for all banks.
We need bank transparency so regulators, analysts and investors can compare them to one another and measure their health and risk to the financial system.
Is it so hard to ask our government to demand that the banks it is responsible for safeguarding the public from are transparent enough to measure?
By having transparent uniform accounting standards and transparent bank capital requirements and metrics, global capital markets would become more stable because investors could far more accurately price risk and reward.
Sometimes the best solutions to complex problems are the simplest ones. Transparency as a starting point has to be goal number one. But uniform accounting standards and capital standards in an increasingly interconnected world would also be a huge step forward.
Related: Financial Sector ETF (NYSEARCA:XLF), Direxion Daily Financial Bull 3X Shares ETF (NYSEARCA:FAS), ProShares UltraShort Financials ETF (NYSEARCA:SKF), Direxion Daily Financial Bear 3X Shares ETF (NYSEARCA:FAZ), ProShares Ultra Financials (NYSEARCA:UYG).
Shah Gilani is the editor of the highly successful trading research service, The Capital Wave Forecast, and a contributing editor to both Money Morning and The Money Map Report. He is considered one of the world’s foremost experts on the credit crisis. His published open letters to the White House, Congress and U.S. Treasury secretaries have outlined detailed alternative policy options that have been lauded by academics and legislators.
His experience and knowledge uniquely qualify him as an expert. Gilani ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When the OEX (options on the Standard & Poor’s 100) began trading on March 11, 1983, Gilani was working in the pit as a market maker, and along with other traders popularized what later became known as the VIX (volatility index). He left Chicago to run the futures and options division of the British banking giant Lloyds TSB. Gilani went on to originate and run a packaged fixed-income trading desk for Roosevelt & Cross Inc., an old line New York boutique bond firm, and established that company’s listed and OTC trading desks. Gilani started another hedge fund in 1999, which he ran until 2003, when he retired to develop land holdings with partners.