A Revolt Against The Concept Of Bank & Broker-Dealer

Twenty-five years ago I complained about the intention of banks to acquire broker-dealers for the purposes of using them as part of a product distribution system. Then I complained when the registered representatives of these broker-dealers, whose only license was to sell securities, had their calling card title changed from registered rep to financial advisor. Then I complained when the bank operators themselves started representing their own sales and marketing staff as financial advisors.

I really never stopped complaining because I could see the end game of the people in charge of the leading banks and broker-dealers, which was to merge the financial system and capital market, paving over the difference between assets and liabilities, and eliminating the checks and balances in double entry accounting with concepts like off-book or tiered liabilities.

So, then I complained about the use of the term investment bank because it was an obvious (to me at least) attempt to cover up the conflict of interest between a lending bank, which buys risk in the form of loans and an investment bank which sells risk, one example of which is their syndication and selling of those loans to investors.

You want proof of when I started this campaign? It was in December 1987 when I incorporated myself, a registrant in capital markets only and a person who had never worked a day in a lending bank, as William Cara Investment Bancorp. I then immediately obtained from the Ontario Securities Commission registration as a Limited Market Dealer. Lawyers, accountants and bankers even asked me what was that all about. At the time they didn’t know what a Bancorp was or what an LMD was. They asked me privately if I was a lender. The truth was I didn’t even have a balance sheet and I had neither operating procedures, nor manual because I was cutting new ground. I was ahead of my time. But in fact I knew the system was headed on a collision course.

All through the years leading up to the ultimate crash in the financial system there was patent dishonesty by banks. I held them accountable all through the past 25 years. They clearly ignored the notion of accountability, preferring to advance the notion, “trust us, we are your bank”. As part of a Self-Regulated Organization (SRO), these banks purposefully blurred the lines between commercial/personal banking and investment banking. They wanted their cake and eat it to. In fact they ate so much cake they finally blew up the credit market system, taking down with it the capital market system.

At the end, in the summer of 2007, few people could distinguish between bank and broker-dealer. My term Humungous Bank & Broker (HB&B), which I had widely used for five or six years by then, as I saw the problem growing into an unstoppable malignancy, had become a reality.

What is happening today with the pay limitation revolt against banks is in fact a revolt against the concept of HB&B. The man who was in charge of the financial system in the U.S. all through this period, Alan Greenspan, now says that if HB&B has grown ‘too big to fail’ it is simply too big. Wrong again. The problem of conflict of interest is being ignored yet again by Mr. Greenspan.

A properly structured market will manage itself through competition.

A lending bank, for example, ought to be able to grow to any size if it manages its borrowing and lending time and rate spreads best among its peers and effectively markets that success. If another lending bank can beat them at this model, they will take business away, and the fact is there is only so much business. The market controls itself, and only limited government regulation is required.

An investment bank that oversells risk with the result that its clients lose, or as a minimum fail to meet their stated objectives, will fail to grow. A transparent and free capital market will manage itself because nobody who is an independent owner or manager of capital sets out to lose. Unfortunately, we have been squeezed out of our capital market, which has served our need for price discovery, by Interventionists, like the Fed and Treasury, who use this market as a policy tool, a political device, and that, in addition to the merging of the capital market with the credit market based financial system, is why the capital market has become unstable.

Until mistakes are admitted and the market system that has evolved into the monster it is today actually totally fails to meet the needs of the owners of debt and equity capital, I believe the market will remain unstable, causing increasing numbers of participants to quit using it.

The bottom line has always been integrity. Conflict of interest destroys integrity. Eliminate conflict of interest and the integrity will return. The market will then function and ultimately be the determinant of the ‘too big to fail’ issue.

Have a great day today, but as an aside, the market has reached a severely over-bought condition. On my proprietary system, I now have (i) 26.2% new (last 5 session) Sell Alerts, (ii) 62.6% Distribution Zone tickers (some with still rising RSI-7 indicators, but the majority as Reversed and now Falling RSI-7’s, which is negative), (iii) 5.6% Accumulation Zone tickers, but mostly falling RSI-7’s, which are unattractive, and (iv) 5.6% Buy Alerts, but half of these with falling RSI-7’s. Momentum has changed. If the $USD strengthens at this point, I believe the selling (and drying up of bids) will escalate. An intermediate-term Bear phase may then be upon us. It is pathetic to say this, knowing the implications, but it will take a further crash in the US Dollar in the global forex market to hold or possibly reverse this negative momentum. The issue really is, how much in terms of the price of an ounce of gold do Americans want to pay for a loaf of bread, a gallon of fuel for their auto, an auto, a home, and so forth.

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