it's a post nine pm moscow time our top stories of r.t. tonight the syrian government says yes the kofi announced peace plan for a negotiated end to the bloody conflict was crawling over zisha need to seek a unified front against the assad regime. guarantees that for an arms race a clear choice is delivered by dimitri medvedev to washington over its missile defense system in europe that says the russian president summed up the results of the nuclear summit it's all. but it's not a summit some gentle grab the media's attention had triggered

a storm on capitol hill but a conversation between obama and medvedev which wasn't supposed to go public. on the u.s. jobs market in tonight's capital account. good afternoon and 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 whew we is maybe on the way is it really because as our guest says t b t ass really means trust byrne named d. to fund and john poor design 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 guards less has he gotten away with other types of fraud already and you credit derivatives like those he 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 twentieth's seventy five percent of the u.s. population will be obese and will 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 is over the counter derivatives market amounts to more hundred more than seven hundred billion dollars

these are drive it is which warren but buffett investor has famously called weapons of mass financial just struction and it was a credit derivative junk resigned was trading that led to m.f. global imploding now we are lucky that our guest janet have a koli president of tactically structured finance is an expert in that is she's also author of this book the new robber barons how bankers created an international all of art and she is going to help us understand what issues 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 and 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 darkie we saw of course that greg smith goldman sachs op ed which said that profit is only relative and you have people in the financial press saying come on this guy's kind of naive obviously profit is. only

motive i'm wondering if this is more broadly the eat those on ball street and if so what lengths are broadly acceptable to go to to achieve these profits well i hope that 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 the profit and lot of 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 in many of our major financial institutions is what we call control fraud and in a control fraud the employees post their 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 made money isn't the key operative issue the issue is the quality of those earnings and

did your employees in gauging control for the damage to your own institution so far congress and our regulators have decided they were 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 to get bail 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 that sort of in the minuses a lot of the issues that occurred that led to our financial crisis and the fact that this can happen after the financial crisis after 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 the world is watching i've heard so many people said that this is just royal bait and come on. these 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 doubt. or do you think that provides a longer john course i knew about the volatility of these trades and it evidently customer funds would have to be reached until well you know i think he absolutely did know that he had a problem with those transactions but if i can look at the size of the transaction in their march two thousand and eleven report people keep saying this is 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 looked 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 as risk manager expressed concerns the he gave the board pushed back he said if you're going to fight me on this leave and they should have said promise. 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 a vision for regulators to understand the reason why now was a combination of things learned and i'm glad you asked that question because once again you have our accounting board fayaz be allowing john corps to characterize what was in substance a total return swap to maturity. which is

a type of credit derivative it's a type of funding and includes a type of credit derivative. they allowed him to characterize that as something that sounded more benign to maturity transaction well known repo is off balance sheet but 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 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 had 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 where 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 in instead he knew he was having this capital call from finra it was downgraded instead of closing it down and saying actually we're in bankruptcy he was trying to sell him of global 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 the monster we don't keep track of the trades anymore with a feather quill in ink and 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 are 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 well that 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 and the global wouldn't have the where with all that was is 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 for signing off 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 oh i would like it to be jail time and i think most of the actual pros are looking at this and they are just whacked for it because it just shows you the degree of financial literacy 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 core design is innocent he's sincere nobody who's competent 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 first 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 institution sets correct h.s.b.c. took a six billion dollars write down for. fourth quarter of two thousand and six they

took that right down and really two thousand and seven our banks weren't writing down their son prime positions and you have to ask why not when people like you were saying. they 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 this is virtually every deal that came to market in two thousand and seven had elements of fraud in them well 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 telling some kind of line for 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 the 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 to jump with those guys. we're going to go to break but we'll get you back with so much more with janet have a call the president of tactically 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 to your g.p.s. coordinates we'll give you our three cents on live healthy regulation government grounding is getting in the way of this innovation but first your closing market numbers.

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welcome back before the break we were talking about global and how much is a recall in with anybody of the jets if 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 a customer funds but why this firm imploded what the trade was that 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 tactically structured finance and one thing i want to ask because of course the trade. that in 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 that's 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 seen with c.d.'s it's kind of the pain it's ours 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 up much money upfront in order to earn a tremendous amount of upside that let's say that you have a security coming at par like subprime securities came in they were one hundred cents on the dollar since are fixed incomes securities when they come in a hundred cents on the dollar and when they're riddled with fraud they're 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 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. employment once the deterioration became obvious to the general public but wristed 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 is happening in the market because in riverdance 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 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 credit derivatives business such wonderful hedging instruments and if the vote 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 for it is you see it in currency derivatives

and commodities after the financial crisis j.p. morgan made a huge bet and call 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 that 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 effective about it and the world 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 laws that we already had on the books early 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 these acts 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 you know they can go all do because there's really no there is no it would punishment be criminal prosecution yes absolutely 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 act you signed on to a letter with bill blacks and 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 an up on president obama's desk and signed by the way that it looks like you said you have a definite example of how this opens the door to fraud yes if you want to create

jobs are you creating a lot of jobs for people who want to turn to a life of crime 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 fly off 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 to outing stocks when did we get into trouble with them 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 isn't a billion 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 first 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 in perth telling us all of this very insightful information this is great ad that was janet have a call the president to tell the police tortured by and thank you. all right let's wrap up now with a little loose change to end your day the organization for economic cooperation and development is predicting that by the year two thousand and twenty and this is a dire prediction folks seventy five percent of the u.s.

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

inflationary for food or other products all right it would cater towards this 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. because this is the big deflationary wave with somebody crashing on our shores in eight years ok according to this report ok you mention the threat of obese people in deflation i still think that i've bigger 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 that too big to fail banks and a concentration of of those folks i think they're quite skinny they don't pose the same breath but i mean are there much behind i have to agree with you there is a there is a core there is a corollary there they're scared 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 a combination there so i would kind of agree he doesn't get it then you too big to fail can have them fail or the economy is going to implode so so people will begin to get us out micah all right moving on speaking of businesses that are trying to profit off of this trend in obesity and you know i think we have a sound bite. talk over these talking supreme show me the real nacho cheese the readers and a few c.d.'s none of which were anywhere near. this year so job spreads that you did sixty five. well instead of having to drive to get tacos what about having them delivered a silicon valley startup thinks that is the way of the future they want to develop a taco copter tacos delivered by drone you submit an order on your smartphone and it just drops that taco right in your mouth and 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 so is this regulation getting in the way of american innovation. it is getting in the way but this is part of the bigger problem the regulations that the government has a regular problem that it creates ultimately there's a result of corn subsidies or something would have all these obese people to be tacos flown into their mouths all right that's we would need these crazy helicopters to actually feed what so this boils down to farmers and the farm lobby and the subsidies that they have achieved that's right and talk about probably 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 ventures 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 lot of muslims have 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 were not what war with the u.s. using drones the people in. the middle east who are using those the bomb people talk you're bombing people's mouths or making people obese and you're going to cause a deflationary wave in class. this is their order of the us a call at their own desire and will to meet your supposed to be able to choose and have liberty and individual freedom and capitalism you argue for that every day with all the talk and i don't know how i was very articulate of this but if it were the way i work we're going to do 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 paul and mike said last bought 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 will 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 night. well . it's technology innovations all the developments around russia we've got the future covered. i'm.

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