[TinyRedLeaf]

FBI probes finance giants for fraud

WASHINGTON (Sept 24, 08): The US Federal Bureau of Investigation confirmed today that it is investigating allegations of fraud by 26 Wall Street firms, without naming investment giants believed to be under investigation.

"The director and others have confirmed the number of investigations that we currently have, but we haven't named any of the companies," an FBI spokesman told AFP. "The director last week indicated that there are 24 corporate fraud investigations involving the sub prime industry," he added.

The FBI probe aims to determine whether company executives had any responsibility for the institutions' financial woes through "misinformation or material misinformation", CNN said.

- AFP

A mildly interesting development, but a quick check with other news reports reveals that it's highly unlikely that the FBI would unearth damning evidence against the fattest cats in Wall Street. The FBI director has, however, publicly vowed to pursue anyone suspected of financial fraud.

Originally Posted by Tri-ring

Capitalism at it's purist is as dangerous as pure Socialism because both do not factor in Human Greed nor laziness.

Actually, I think capitalism is a lot more cynical than socialism. It assumes that humans are greedy, and harnesses that greed to produce economic profit.

Originally Posted by 4Tran

I'm far from being all that knowledgeable about finances, but I'll try to summarize the three points in that video:
1. Everyone must list their assets, and give instructions as to how they valued those assets.
2. Everyone must make contracts based on what they own.
3. All leveraging is capped at a 12:1 ratio.

The first two points basically address accountability, which is the necessary first step towards long-term solutions for this crisis. Every financial institution needs to come clean about how much bad debt they hold. Right now, investors are unsure about whether they've seen the worst, and the lack of confidence is harming efforts to clean up the problem.

I highlighted the third point because I see it as an essentially pointless suggestion. How much leverage is safe leverage? That's virtually impossible to say in advance. It all depends on an organisation's risk appetite. It doesn't change the simple fact that if you owe more than you can pay, you'd still be bankrupt, no matter how little you owe.

Originally Posted by Solace

The problem is that the economy has changed a lot since my education 15 years ago. The average American has about the same grasp on the system as I do, maybe a little worse. We didn't all go to college to continue such studies so we're relatively uneducated on the complexities and changes of the system as it has become today.

This is why we're struggling to understand what all of this means.

I agree totally. It's becoming increasingly clear that ordinary people are in dire need of financial education. But we don't need to understand all the arcane complexities behind financial instruments to have sound finances.

Even simple things like learning fiscal discipline, how to calculate simple and compound interest, how to read basic financial statements and so on, can go a long way towards improving an individual's financial literacy.

Most of all, people ought simply to learn how to save. Consumers have been suckered by commercials about easy money for so long that they've forgotten that cash in hand is worth a lot more than all the "future money" you haven't actually earned.

Rule No. 1: Credit doesn't make you richer. It only makes you poorer the longer you hold on to it.

Originally Posted by 4Tran

If anything, the government probably should have been taking more of a wait-and-see attitude than this wild flailing about. So far, there have already been huge amounts of oftentimes weird regulations placed on the market, and there's so much flux in the rules that massive swings are inevitable. It's awfully hard to figure what's up when the rules that were in play at the opening bell have been thrown out the window by the closing bell.

I don't fully agree. If anything, I believe the Fed and the US Treasury should have acted a lot sooner rather than sitting on the problem, hoping that the market would eventually sort itself out. As long as the bad debt continued to sit on every financial institution's books, the problem will never be completely solved.

Someone has to pay the price. It's very unfortunate, however, that he ends up being the American taxpayer. I'd much rather see every chief executive of failed investment banks and insurance companies surrender their pay cheques instead. It is galling that ordinary people should foot the bill for a mess that they've created, and earned millions while doing so.

Meanwhile, regarding Green²'s assertion that the bailout would weaken the US dollar, he is right. In the long term, the US Treasury will have to print more money to pay for all the debt it is proposing to buy.

That would eventually lead to the devaluation of the US dollar, which would make imports more expensive. That would curb consumption, and if this happens severely enough, it could trigger a US recession. On a wider scale, the world might be tempted to abandon the greenback on global forex markets, which would further destablise the US economy. A weaker dollar also makes US dollar-denominated financial instruments less attractive to foreign investors, making it harder for the US government to raise cash to pay for the bad debts.

On the other hand, a weaker dollar could help boost US exports, and in a best-case scenario, that could help the US close its trade deficit. It would also make US assets more attractive to foreign buyers. Of course, Americans would be leery about letting foreigners buy various national institutions, but then again, beggars can't be choosers.