Joe Nocera's outstanding column about the Libor scandal and Barclays tells us four key things.
First, we cannot rely on "trustworthy" bankers to protect and run the financial system.
Second, the regulators weren't in a position to independently assess whether Libor was being rigged.
Third, "$350 trillion worth of derivatives and $10 trillion worth of loans are based on Libor." This means that the banks involved in rigging Libor could be subject to enormously expensive civil litigation.
Fourth, the banks are going to try to deflect the blame for their malfeasance onto regulators.
What a colossal mess -- all occurring just when the developed economies need a stable and reliable financial system.
It's time to face financial facts. Opacity and leverage are the core problems with our banking system and Limited Purpose Banking, which I discuss in my book, Jimmy Stewart Is Dead, fixes both.
The problem with opacity is that even the slightest sign of fraud or financial distress places everything the opaque bank is doing under suspicion. And since creditors can take their money and run, that's exactly what they do. No one can tell today how deep the rot in Barclays runs or how many other "risk managers" at JP Morgan are actually "risk manufacturers." No one can tell the true condition of the BIGPIS (Belgium, Ireland, Greece, Portugal, Italy, and Spain) banks and no one trusts their books.
Yet there is not a single official in the U.S. or Europe brave enough to take on the bankers and say what needs to be said, namely:
"Boys and girls, the party's is over. You have one job and one job only -- financial intermediation.
If you want to gamble, be our guest. But do so on your own time, in your own home, and on your own dime. As a group, you are not to be trusted. So we're going to let you exercise your significant skills and generally good judgment, but in a way that doesn't threaten our savings, jobs, and families.
From here on out you'll have to work within a new financial system, called Limited Purpose Banking, that makes you stick to your legitimate purpose -- financial intermediate.
Look around. The one part of your industry still standing is the mutual fund industry, which generally stuck to its knitting -- connecting suppliers of, and demanders for, funds.
The reason is simple; mutual fund companies, which are 100 percent equity financed (this doesn't include "backed-to-the-buck" money market funds) didn't play craps with their company's capital.
Limited Purpose Banking transforms all of the financial corporations in which you work, whether they are called commercial banks, investment banks, hedge funds, insurance companies, private equity funds, venture capital funds, brokerages, credit unions, or something else, into pass-through mutual fund companies.
None of your companies, which we'll just call banks, will ever again be in a position to fail because none of your banks will ever again be allowed to borrow short and lend long and leave the public to pick up the pieces. The public ultimately bears the risk of investment and the public, with your proper help, is going to decide what risks to take and what risks, including systemic financial collapse, to avoid.
All banks will be subject to the same regulation, regardless of their particular line of business. A single federal regulator, the Federal Financial Authority (FFA), will verify, disclose, and supervise the custody and independent rating of all securities held by all mutual funds. This will put an end to the pervasive fraud that now attends your initiation and sale of vast numbers of securities."
Under Limited Purpose Banking, all purchases and sales of securities by mutual funds would be instantly available online. So averages or other amalgams of interest rates or other financial valuations could be verified instantly. The FFA would oversee this disclosure, which would be trivial to do because all purchases and sales of securities by mutual funds would occur in public auctions.
There is a way forward that doesn't require David Cameron wasting his breath calling for better banking culture. We can fix the banks, but to do so, we need to crush a lot of their eggs, starting with their claim to proprietary information. It's time to end faith-based banking and make the master secret-keepers do what other honest businesses do -- disclose what the hell it is they are selling.