good afternoon now welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for march twenty sixth two thousand and twelve bernie he speaks then everyone seems to listen in his speech today he warned about the job market and said continued accommodative or easy money policies will be needed to make further progress this has the financial press reading the tea leaves saying more q we is maybe on the way is it really because as our guest says t b t really means trust burning key to fund and john kors on did he or didn't he knowingly transfer close to two hundred million dollars in customer money

from m.f. global to j.p. morgan on one occasion before the firm imploded internal e-mails have come out that reportedly point different ways were guard less has he gotten away with other types of fraud already and do credit derivatives like those used to bet the firm on europe's debt crisis continue to pose a major risk to markets and does regulation do anything to stop this and the o.e.c.d. predicts by twenty to twenty seventy five percent of the u.s. population will be obese we'll ask is this deflationary for the global economy and a drag on economic growth let's get to today's capital account.

now today the financial press is mourning over released internal e-mails that say maybe or maybe not diddy didn't need i'm talking about m.f. global c.e.o. the former one john kors on whether he authorized or didn't authorize customer money transfer to j.p. morgan before the firm imploded meanwhile bernanke is warning about unemployment and the financial industry is wondering whether or not this means more quantitative easing is coming from the central planner in chief but below these headlines and below the surface of the banking system on any given day is this gigantic shadow banking system including the derivatives market of course ninety five percent of all of these trades are in the unregulated over the counter market according to a european commission report and this market because over the counter derivatives market amounts to more hundred more than seven hundred billion

dollars is a derivative which warren buffett investor has famously called weapons of mass financial destruction and it was a credit derivative junk or as i was trading that led to m.f. global imploding now we are lucky that our guest janet tactically president of have a call the structured finance is an expert in derivatives she's also author of this book the new robber barons how bankers created an international all of our and she is going to help us understand what issues of this and others like fraud still pose to the financial system so first of all welcome to the show we are so happy to have you here in washington d.c. it's great to be here lauren great so before we get into m.f. global or any kind of specifics i'm just wondering more broadly because your bank is about the all the banking all of our we saw of course that greg smith goldman sachs op ed which said that profit is the only motive and you have people in the financial press saying come on this guy is kind of naive obviously profit. only

motive i'm wondering if this is more broadly the egos on ball street and if so what lengths are broadly acceptable to go to to achieve these profits well i hope the profit is the motive this is the money business after all there's nothing wrong with making a profit the question is how you make a profit and what are the quality of those earnings and what we saw prior to the financial crisis if the earnings that were being reported were very much putting their institutions at risk what was going on at many of our major financial institutions is what we call control fraud and in a control fraud the employees the host they're like parasites on their own financial institutions so financial institutions that say we were innocent we lost money on their trade they actually are getting it wrong because whether or not you need money isn't the key issue the issue is the quality of those earnings and

did your employees and gauge and control for the damage to your own institution so far congress and our regulators have decided they're going to look the other way and not investigate what was widespread massive fraud in our financial system and do you think that this parasitic control fraud is the accepted norm within these too big to fail firms well it has been in certain areas now you hope that some of this is being cleaned up yet again and again we see things happen like m.f. global as an example now that sort of appear to minuses a lot of the issues that occurred that led to our financial crisis and the fact that this is going to happen after the financial crisis after dodd frank after sarbanes oxley just shows you how lax and hypocritical we're being in the united states about financial regulation and the world is watching but yeah the world is watching i've heard so many people say that this is just royal faith and come.

oddities markets let's get into m.f. global little bit more because what i'm interested in do you believe that these trades really got out of control and so john course i won't freak out or whatever. or do you think that for advice a longer john course i knew about the volatility of these trades and evidently customer funds would have to be reached until well you know i think he absolutely didn't know that he had a problem with those transactions but if i can look at the size of that transaction in their march two thousand and eleven report people keep saying it was a six billion dollar transaction actually that's not correct it was eleven billion plus he was long some of the weaker european credits and short credits like france now they didn't give the size of each individual position but that said given what he was long and given what he was short as stated in the march report at least when

you look at what was happening during two thousand and eleven i believe that there were several days in two thousand and eleven when m.f. global was in the negative equity position and that should be investigated now you'll notice that course i went before his board long before the bankruptcy is a risk manager expressed concerns the he gave the board pushback he said if you're going to fight me on this i'll leave and they should have said promise you know instead the board caved because i think the board perhaps didn't understand what was really going on with those transactions and what i want to ask you you said that that was in their ten-k. that regulators had information about this risk so why was that overlooked is this just too difficult position for regulators to understand or the now or as a combination of things to learn and i'm glad you asked that question because once again you have our accounting board fayaz be allowing john cores to characterize what was in substance a total return swap to mature. which is

a type of credit derivative it's a type of funding includes a type of credit derivative. they allowed him to characterize that as something that sounded more benign a reposed to maturity transaction well known repos off balance sheet with this transaction was an off balance sheet transaction had he called it a total return swap to maturity i think that would have raised more red flags with the board it would would have raised more red flags with regulators but even so had they really understood the transaction they would have understood it had all the risks of a total return to maturity it ahead of the mark to market risk the price risk as those securities fluctuated in value and the position was too big given the amount of capital that m.f. global had now knowing that going into the. into finra asking for more capital or you're likely going to get a downgrade if you can't come up with more capital course i didn't scale back that

position and he really needed to scale back that position instead he knew he was having this finra he was downgraded instead of closing it down and saying actually we're in bankruptcy he was trying to sell them. and in trying to sell it they dipped into customer money well i'm here to say he's saying he didn't understand his cash position and he didn't understand that he was running out of money and i have to say oh that's not. we don't keep track of the trades anymore with a feather quill and ink we actually listen to others. thinking about computers the wonderful thing about computers is that you can use them for something besides e-mail you can actually use them to instantly track transactions and instantly calculate your positions when you know them together i can tell you any given time how much cash i have and i have a segregated account for clients it's kind of a microcosm but just to give you an example i mean you were you can always know

what your own cash position is and certainly. given the amount of cash that went out the door that one transaction that was two hundred million obit was around thirteen percent of his june two thousand and eleven net worth come on you can't tell me he wasn't asking questions about where that money was coming from and that he didn't know that m.f. global wouldn't have the where with all that was his trade he took ownership of that large transaction and one thing that you point out too if we want to stay on risk is that junk or design signed off saying internal controls were adequate and one of the things you point out is that sarbanes oxley was meant to assure americans that officers would be held responsible first signing up on these kind of documents and should be held accountable so what is accountability look like is it fines is it criminal case what is it in this case i would like it to be jail time i think. pros are looking at this and they are just laugh it because it just shows you the degree of financial illiteracy in congress when they can't even properly

question john. and you know get a straight answer out of the guy and you know none of us believes that john poor design is innocent of mail few cents here nobody knowing it was competent or who is a financial professional so you mentioned congress but i want to stick on regulators for one more moment because it seems like with this example you gave us our brains oxley it seems like you have a disaster like enron and then you have an effort to regulate so that it doesn't happen again like with sarbanes oxley and then you have the same practices that continue and post enron go unpunished so my question for you what is the point of regulation f they're not enforced is it just person oh yes it is for show it looks as if the regulators are there to protect the bad guys we didn't hold c.e.o.'s of our major banks accountable for accounting statements that they signed off on in two thousand and seven that were false and these are c.e.o.'s of large. too big to fail institutions that's correct h.s.b.c.

took a six billion dollars write down. for the fourth quarter of two thousand and six they took that right on and really two thousand and seven our banks weren't writing down their so prime positions and you have to ask why not when people like me were saying that the lawsuits basically mis marking their books they're plonking the regulators and they were they accelerated their securitization activity to dump this trash on investors in two thousand and seven throughout two thousand and seven basically virtually every deal that came to market in two thousand and seven had elements of fraud in them and you know we just have a minute before we go to break but you mentioned the illiteracy of congress i want to ask you about the mainstream press because i notice you've been critical of wall street journal for that vaporized m.f. global story and fox business news for suggesting that this was just like accounting you know oversight or just messed up bookkeeping or something you know this particular yeah and i want to know do you think that the mainstream press is just not well enough informed or do you think that they're towing some kind of line

or really that i don't know it looks as if congress has been bought off in the form of campaign contributions not all of them but many just seem to be dodging the issue and protecting people that they should be regulating they are not protecting public interest here when you look at mainstream media i have to wonder whether they're accepting payola or they're hoping for a job within the financial system and so they don't want to clear their chances of a job and they're basically throwing marshmallows at these guys they aren't doing investigative journalism it's a good thing i don't want a job with those guys that we're going to go to break but we'll get you back with so much more again and have a call the president emphatically structured finance and still ahead look right there not a bird or a plane it's a taco copter yes that's a drone that will deliver tacos your g.p.s. coordinates look at your three cents on why the pesky regulation in government grounding is getting in the way of this innovation but first your closing market

numbers. he has put a picture of me when i was like nine years old i want to tell the truth. i confess when i am in total get a friend says i love rap and hip hop is a pretty. it was kind of a yesterday. i'm very proud of the world without you as a place. oh. look. you know sometimes you see

a story and it seems so you think you understand it and then you glimpse something else and you hear or see some other part of it and realize that everything is ok if you don't. charge was a big issue. what drives the world of fear mongering used by politicians who makes decisions. who can you trust no one will is you with the global machinery see where we had a state controlled capitalism is called sackfuls when nobody dares to ask we do our t. question more.

welcome back before the break we were talking about global and how much is a ripon with anybody the suggests that there wasn't fraud or that this shouldn't be punished in some very serious way now i want to talk more broadly about the main issue here isn't because the more funds but why this firm imploded what the trade was it was a credit derivative and i want to speak a little bit more broadly about them with a woman who is an expert on derivatives janet have a holy president of tactically structured finance and one thing i want to ask because of course the trade wars i was betting on europe with was a credit derivative what i want to know you point out something really important i think which is that credit derivatives are primarily used for leverage and c.d.'s would be an example of a derivative and it sounds like from what i've read of your work if you're actually had been with c.d.'s it's kind of a pain it's far is the contract language and the pricing and all of that but it's very popular for leverage so can you explain why speculators love this well you

don't have to put much money upfront in order to earn a tremendous amount of side that let's say that you have the security coming at par like subprime securities came in they were one hundred cents on the dollar since or fixed incomes securities when they come to one hundred cents on the dollar and when they're riddled with fraud they're only going to go down in value fast but one thing first came to market you could buy credits for protection on those securities very inexpensively so you put up almost no money up front and then you could make millions or in the case of john paulson billions by putting a very little money up front if you looked at the securities and you knew they were going to do nothing but play employment once the deterioration became obvious to the general public what risk did they still pose today and also i'm curious how if they allowed banks to hide risk and also how have they benefited big banks in term

. well they you can put in a lot of hidden fees with this that's why it's also very popular but you know derivatives and it pains me to see what has happened in the market because derivatives were originally developed as hedging instruments however now they're primarily used for speculation gary gensler the head of the c f t c say that most of the people in the market are not customers but rather their financial institutions or others and basically he's saying that most of the people who are now in the commodities market in commodities futures a kind of derivative or speculators i would say the same thing is true in the credit derivatives market and people say well we can't get rid of produce because it's such wonderful hedging instruments and i said well can you get rid of the speculators please because what you are seeing are a lot of distortions in the market and the size of the market is mainly driven by speculation now it's not just credit derivatives you see it in currency derivatives

and commodities after the financial crisis j.p. morgan made a huge bet and coal they lost money. one point they basically were the coal market you know coal isn't a strategic commodity but when you look at the commodity market as a whole being dominated by speculators they have is a strategic risk to the health of the united states to the health of the commodities markets and yet we're really not doing anything affective about it and will will dodd frank change any of this no. it's not addressing the key issues that are the real threats to the u.s. economy and it's more than just having the laws on the books we didn't enforce the laws that we already had on the books clearly and so is it sounds like the only way that you're saying to tackle this whole derivatives market and the rest is to get rid of speculation or to punish malfeasance i think if you start there if you basically go after people who have committed fraud and you aggressively go. after

that you go a long way to start cleaning this up and then when people do speculate they're going to have the wherewithal to back up their transactions instead of trying to sweep it all under the rug and get the government to bail them out or hide things in special vehicles or you know use structured finance in the most malevolent malicious way possible to cover their own reruns which now they can do all do because there's really no. no it would punishment be criminal prosecution yes absolutely you know people should be doing jail time we should be seeing thousands of felony indictments and just before we go because we're talking about fraud and you have been vocal about the jobs actually signed onto a letter with bill black sand this is literally a wish list of fraud for people that want to commit it did pass in the senate last week with a little tweak to the crowd funding part of it will go back to the house and it's presumably going to be ending up on president obama's desk and signed by the way that it looks this it you said you have

a definite example of how this opens the door to fraud i guess if you want to create jobs are you creating a lot of jobs for people who want to turn to a life of crime but i was contacted by a fellow who was trying to raise private equity and he did something illegal he basically was advertising it on airlines the same fellow ended up later involved in some sort of insurance fraud you know these are good people who try to flout the rules and who are eagerly trying to advertise their shares those are the people who are going to be first in on this so be advertising bogus shares they don't have to provide accounting statements they don't have to be accountable to investors this is a formula for disaster i've never seen anything like this and in addition it's going to allow people to basically write research reports telling stocks when did we get into trouble with that before with world com with other issues. you know when i look at this i just look at it and say what were they thinking this isn't helping small people compete against investment banks this is enabling people who want to

commit fraud. basically have their way with the general public and and this was touted as a great you know bipartisan move the person time i can remember it being one and as long as i've been doing this show it's insane i appreciate you so much for being here and her telling us all of this very insightful information this is great about was janet to have a call the president of the police took her by and thank you. all right let's wrap up now with a little loose change to end your day organisation for economic cooperation and development is predicting that by the year two thousand and twenty and this is a dire prediction folks seventy five per cent of the u.s.

population will be obese now this is the financial show so we ask can this present certain business opportunities for companies to profit well jim cramer thanks so obesity. at that point was was the theme and i see where we're going here stock picker has a bunch of these obesity stands out to me something that as the market comes down this repartee. i completely agree i couldn't agree more dimitri what you think wasn't his capitalism eating itself because you see jim greenwood uses an economic opportunity saying this is a great opportunity to invest in in firms that could profit from america's obesity but obesity itself so this is the pursuit of individual gain these will firms with obesity is a drag on economic growth and it is the flu because if you've got all these obese people it becomes harder fertility rates drop if you're obese ok and it becomes harder to actually do anything to fall for that for eat so how would that not be

inflationary for food or other products all right it would cater towards the seventy five per cent. that is fact. you make a good point about that but i'm saying that overall this is just the sort of deflationary headwind that the fed has been really scared about i think if anything about bernanke you should be worried about it's about these obesity rates to be more concerned about that even back that because this is the deflationary way let me crashing on our shores in eight years ok according to this report ok you mention the threat of obese people and deflation i still think that a bigger threat than seventy five percent of the u.s. population that can do more damage is the few percentage that are the c.e.o. is it too big to fail banks and the concentration of of those folks i don't quite see any they don't pose the same breath when i mean. i have to agree with you there is a there is a core there is a corollary there they're standing but they're too big to fail metaphorically these

people are so big that they're going to cause the economy to fail so i think there's kind of like a combination there so i would kind of agree he doesn't get it then you too big to fail can then fail or the economy is going to implode so. we'll begin to pick up moving on speaking of businesses that are trying to profit off of this trend in obesity and. i think we have a sound. talk over these talk of screens show me real nacho cheese three days in a few cities none of which were anywhere near. so true friends that you did sixty five. well instead of having to drive to get talk o's what about having them delivered a silicon valley start up thinks that is the way of the future they want to develop a taco copter talk was delivered by drone you submit an order on your smartphone and it just drops that taco right now unfortunately the law is being blocked

by the u.s. government because according to f.a.a. regulations you're not allowed to fly drones for commercial purposes though is this regulation getting in the way of american innovation. getting in the way but this is more of a bigger problem see the regulations that the government has a regulate problem that it creates ultimately as a result of corn subsidies ok if you didn't have corn something would have always obese people to talk of those flown into their mouths all right that's we would need these crazy helicopters to actually feed. so this boils down to farmers and the farm lobby and subsidies that they have achieved that's right and taco bell is probably so subsidizing the government wants these drones because they know that in the future they want to maintain their market share has been a case how come the corporate power hasn't been able to over rule the f.a.a. restrictions and been able to get some leeway for their next big corporate venture because this is a small company this is a small innovation what the f.a.a.

brought this you know that yes the f.a.a. and what i was looking at a lot of why a commercial drone i think that this is a much better use of drones than the u.s. government's current use which is killing people both if we're not war the us using drones the bomb people in. the middle east where they're using drones the bomb people talk you're bombing people's noses you're making people obese and you're going to cause a deflationary wave in class. this is their order of the u.s.s.r. at their own desire and will to meet your supposed to be able to choose and have liberty and individual freedom in capitalism you argue for that every day with all the talk to matter in his heart it was very hard to come out of this is that bit more though if i were to have to do it leave it there thanks so much for tuning in and these are to go to our website and tune in to our web exclusive joe wise and all and might set off on a little bit of a tete a tete on the blogosphere over ben bernanke and the gold standard and they were on

our show and they do get out here with me it'll be up online and don't forget to follow me on twitter at lauren lyster also give us feedback at youtube dot com slash capital account and from everyone here at the show thank you so much for watching and have a great. pleasure is that so much. to me when you see these people in your area the documentary film that went viral on you tube about uganda's child soldiers and war jussi called the prison gender very strong. guitar sometimes you see a story and it seems so for life you think you understand it and then you glimpse something else and you hear or see some other part of it and realize that everything is art you don't know i'm trying hard welcome to the big picture.

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