President Obama plans to introduce a fee on the largest banks in the country, with assets greater than $50 billion, in an effort to get back “every single dime” for the taxpayers. This levy will start June 30th and aim to collect $90 billion over a course of 10 years.

With the mid-term elections coming up in November and the unemployment rate still hovering around 10%, this move seems to be driven more by politics rather than pure economic sense and here are the reasons why:

a. Increasing taxes in time of economic weakness is exactly what is not needed. Even if the taxes are targeted at banks, the ripple effect of these taxes will be felt throughout the economy as it will directly reduce the aggregate demand by the amount of taxes collected.

b. Targeted penalizing of good, profitable businesses like JPM, Goldman Sachs, etc. to fund bad businesses like AIG, GM destroys economic efficiency which directly reduces the GDP of a country.

c. Given the massive dependence on credit, Wall Street recovery always precedes Main Street recovery. These taxes will end up reducing the amount of credit risk banks will be willing to take, which will hamper the economic recovery on Main Street.

d. These new taxes will also hamper the big regulated bank’s ability to compete for talent, so I would expect smaller banks, hedge funds, private equity firms to be the biggest beneficiaries. I would also expect to see more financial institutions to lean towards becoming privately held partnerships. This will end up reducing the number of institutions that will be under the regulatory oversight, thereby increasing the systemic risk, not reducing it.

The TARP program and the tax levied will not help in avoiding a future crisis. Bailouts under the guise of “too big to fail” have set a very bad example. The real solution to prevent future crisis is to stop these bailouts. Remove the government safety net which will force the banks to adopt more rigorous risk management practices AND bring back Glass Steagall Act of 1933. (Read more about my views on this in my blog).

“John Lawton looked good on paper. The “fact sheet” for his Minneapolis hedge fund showed he managed $20 million and outperformed the S&P 500 Index. But in fact, Lawton stole $10 million, and his performance was a fabrication. Lawton, 34, pleaded guilty to fraud in a federal court Wednesday. He is facing a 20-year stint in federal prison. In pleading guilty, Lawton admitted he faked documentation that showed he kept client money in an account at Goldman Sachs and investment performance.”
Scams like these can be VERY easily avoided if investors simply follow the “Five Inviolable Commandments” listed in The Future of Hedge Fund Investing. Even a cursory due diligence on John Lawton would have shown that his returns were not conducted by an independent party and a simple call to Goldman Sachs would have shown that they were not the custodian of his fund’s assets.

The US economy lost 190,000 jobs in October and the jobless rate jumped to 10.20%, highest since 1983. But, the real jobless rate of unemployed and under-employed is at 17.50%.
Regardless of how the politicians try to spin this, there is nothing positive about this employment report. It is true that the jobs lost this month has fallen from 450,000 a year ago to only 190,000, but this misses a critical point. The economy has fewer employed people, so the 190,000 as a percentage of the people employed is larger, that is why the jobless rate is still climbing and is at 10.20%.
As long as fewer people are happily employed, spending will be constrained and remember that 2/3rd of the US economy is consumer spending. With the holiday season around the corner, there are a lot of nervous retailers out there wondering if they will be able to get into the black on Black Friday or not.
In this scenario, you can bet that the Fed will not be even thinking about rasing interest rates anytime soon.

The financial crisis of 2008 brought about massive bailouts as the government feared for the state of the credit markets. After all, if the large lending institutions, i.e. commerical banks, failed, it would have severely affected the flow of credit in the market. Home buyers would not be able to take out loans, small businesses would have failed and consumer spending (2/3rd of the US economy) would have collapsed.
But how did these commercial banks get themselves in this mess in the first place? Through reckless investing in highly toxic securities with the depositor’s money and cavalier risk mangement.
Glass Steagall Act of 1933 (after the Great Depression) was passed to prevent THIS very scenario from happening again. Glass Steagall Act seperated the activities of the commercial banks from those of the riskier investment banks. AND for 66 years it worked.
But, after years of lobbying by powerful Wall Street bankers, the Glass Steagal Act was repealed in 1999, allowing commercial banks to once again engage in risky investment banking activities.
Result: 9 years later we paid the price.
Maybe the solution to prevent further systemic risks to the countries financial system is not to introduce complicated policies being floated around right now, but to simply reinstate the Glass Steagall Act of 1933.

The recent Galleon Insider trading scandal that broke on October 16th is nothing new for Wall Street or Main Street. There have been umpteen cases of investors trading on non-public news to turn a profit.
And why shouldn’t they? The temptation of gaining access to information that can result in guaranteed profits is just too large, even when measured against the prospects of getting caught.
The solution is not to increase the policing, as the criminal mind will always find ways to beat the system.
The solution is to increase transparency, such that news at publicly traded companies becomes public ASAP. Soon as company executives make strategiec decisions that could affect its earnings outlook and thereby the stock price, they should immediately release that information to the public. After all the public has a right to that information, as soon as it is available. This will take away any advantage that an insider would have to non-public information and thereby rid the system of illegal insider trading profits.

Book Overview
1. Describes in lucid detail some of the recent scandals involving hedge funds, like KL Financial, Amaranth Advisors and Bernie Madoff and analyzes the causes and lessons for the high net worth investor
2. Analysis of different type of hedge fund investors, like Pension Funds, Endowments, Banks, Family Offices; their crucial need for alpha returns and the expertise needed to source those returns
3. Explores the shortcomings of the current statistics based hedge fund investing model, due diligence process and the lack of expertise in the funds of funds industry
4. Explains in detail the world of trading and the training that goes into making a long term successful hedge fund manager
5. Suggests in great detail a new hedge fund investing model, based on the workings of a Wall Street proprietary trading desk
6. Considers the hedge fund industry’s role in the 2008 market crisis and suggests regulatory changes to prevent a repeat

Before even the thought of an investment can be entertained, a hedge fund must have the following:
1. An independent industry recognized auditor
2. An independent industry recognized administrator/custodian
3. Trade execution via independent entities, like prime brokers
4. Fund valuations conducted independently by a third party, like an administrator
5. Complete transparency and detailed information on the strategy with regular risk and return reporting