Another proof that regulation alone cannot produce sound financial markets

Dialogue with the Alter Ego on the need to demonstrate the superior benefits of a Golden Rule inspired capitalism

Wall Street’s top regulator, sifting through the wreckage of the mortgage crisis, was weighing enforcement actions last year against several large financial companies. But then the regulator, the Securities and Exchange Commission, decided in some prominent cases to quietly back down.  After many months of investigating the roles of Goldman Sachs, Wells Fargo and Standard & Poor’s in troubled mortgage securities — and even warning the companies that enforcement actions were possible — the S.E.C. closed or shelved these cases and at least two others. New York Times, Online edition, Dec. 20, 2013 (see: http://dealbook.nytimes.com/2013/12/19/s-e-c-discord-as-it-examined-mortgage-cases/?hp

Question by Alter Ego of Noah denkt™ (AE): According to a New York Times article from Dec 20, 2013, the US Security and Exchange Commission has decided to drop mortgage crises–related charges against several big financial institutions. It appears that SEC has come to the conclusion that it is not likely that it will succeed in courts to demonstrate that the aforementioned large institutions did in deed commit fraud or “materially mislead” investors when placing their dubious mortgage backed securities in the market. What does Noah denkt™ make of this turn of events?

Answer by Noah denkt™ (Nd): Well, it doesn’t surprise us that prosecutors have a hard time to demonstrate that actions which common sense would view as fraudulent are in deed intended to be fraudulent. This is not the first time that high profile cases of this kind have failed to get the verdict they and the larger public were looking for. That is why we have always argued that the sound future of financial markets depends more on the ethical convictions of financial players than on the regulations that the politicians try to impose in that market. And that in turn is the reason why this project continues to try and demonstrate that a Golden Rule-inspired business conduct does actually produce higher material returns than a non-Golden Rule-inspired business behavior is able to. Because in the end it will not be the promise of spiritual happiness that will induce traders to act socially responsible but instead, it will only be the proof of superior financial returns that will move theses hard knuckled individuals to pursue a reciprocity-based business conduct. AE: Now, we should add at this point that not all sub-prime related cases of the government cases against big banks have failed in court.  Just look at the $550 million settlement with Goldman Sachs over a complex debt instrument. Or think about the four mortgage-security actions against other institutions like JP Morgan which reeked in a total of $154 million in settlements. And then there continues to be the wider case which the US Justice Department is pursuing against S&P, which ultimately might strip that company of the ability to rate certain securities products. So, it isn’t all negative on the law enforcement front.

Nd: No, it isn’t. Obviously we do not deny that law enforcement has top play a big role in the preservation of sound financial markets. But it is plainly wrong to expect those regulatory forces to play the leading part in that endeavor.

AE: Okay. How far has this project come in demonstrating the superior material benefits of a Golden Rule-based business conduct?

Nd: Well, we obviously had a considerable number of forecasting successes in the course of the last years that aren’t easy to replicate by those who question our approach. An one might even say that while we are still alive and kicking a lot of hedge funds and investment banks had to cease operation or were taken over by an outside predator. But, it is also true that we haven’t gotten very far in terms of material recognition be it for the quality of our forecasts or be it for the wisdom of our philosophy overall. That doesn’t mean, however, that we would be prepared to throw in the towel at this point. Instead we continue our quest and remain confident that subject material recognition on a larger scale will eventually come.

AE: And until then you will continue to make a fool of yourself?

Nd: If that is how you choose to see this, then, so be it.

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