we want to present. something your. good afternoon welcome to capital account i'm lauren lyster here in washington d.c. these are headlines from may seventeenth two thousand and twelve as world leaders arrive in the u.s. for the g. eight summit not to mention the nato summit is coming up this weekend we'll talk about the reale paula teak of the u.s. situation when it comes to generating economic growth chris whalen has written about a choice between debt and inflation or war and says finding a way to avoid these two extremes is now the chief concern he is here we will talk to him about why yesterday we told you about deposit light from greek banks today we talk spain where the country is denying reports of a bank run at its second largest lender bankia this as greece wears in

a caretaker government to run things until elections next month the next step ideally towards certainty this begs the question though are we seeing a run on europe go on as we speak and when things are bad in the economy it's usually good for people in the business advice but are things so bad in europe that even strippers are threatening to walk well that's what appears to be happening in paris we'll talk about it let's get to today's capital account. all right before we get to some of those headlines let's bring you up to speed with the latest in whale gate because jamie dimon has been invited to testify before the

senate banking committee reported late also j.p. morgan's two billion dollars trading loss has prompted the new york fed to examine how banks and its district are managing deposits of course it begs the question if jamie dimon gets any say in that he is on the board of the new york fed after all and also on the hill today officials from several financial regulatory agencies were testifying before the house financial services committee on the settlement practices of u.s. financial regulators so this is a good time to have only hearing of our own on this issue to talk about regulation and for rod after all this is the real word on wall street that no one wants to utter helped perhaps by their cronies on capitol hill there is a major factor that may be working against victims of fraud and unless you are an m.f. global customer you may be surprised at what it is take

a second think about it. think of your gas wall or your gas rather well i bring in our guest christopher whalen he's senior managing director at tangent capital partners and author of inflated how money and debt built the american dream so chris whalen i said with fraud there is this issue that people might be surprised really can hurt victims in getting their money recovered even if they're the victim of fraud that's right what is that surprise issue you've been writing about it well in the one nine hundred twenty s. in the one nine hundred thirty s. we had a lot of fraud a lot of securities fraud and it took about ten years for congress and the courts in particular to realize that that was the problem same thing now we've had five years of brock obama george bush and they've done nothing to prosecute fraud you talked about him of global one of the big problems is the victims in that fraud didn't realize that the trustee who takes care of the bankrupt company can't represent their interests this is the issue that i want to get to that is what

people would not imagine that's what's in the way of victims getting their money and it's actually the bankruptcy law that's right i want to bring up you've been writing about this let's take a look at how the laws may be stacked up against victims something that you've written about you said well many people are confused by the fact that the maid off trustee has been unable to recover billions in funds stolen from the customers of the made off firm from j.p. morgan and other banks this situation simply reflects u.s. law so you talk about these issues that from made off to m.f. global bankruptcy as the result of bankruptcy law explain what those issues are well a bankruptcy courts not really a court it's part of the intersection of branch ok there's only three kinds of equity courts and united states district courts courts of appeal the supreme court they're the only ones who can make decisions about wife and limb and judgments you know the words to restrain property in the bankruptcy process the judge and the trustee are just concerned with the defunct entity and then i see

a state that's right to state of the bankrupt entity whether it's a company or. person so there's really nobody to represent the interests of the third party back in the twenty's it was very common for the trustee to also be appointed receiver the difference is the receiver has authority from the federal district court very different so if stanford group for example you had a big fraud no bankruptcy the victims in the fraud simply went to a federal judge and so this fraud we need a receiver and that individual was able to not only get the money back but he was able to pursue bad actors and he was able to refer to the u.s. attorney for criminal prosecution they have a much broader powers and unfortunately the victims in these frauds especially when the energy goes into bankruptcy don't understand their rights and their lawyers often don't understand their rights the first thing that the maid off victim should have done is gone to the federal district judge judge breakoff in this case and said look there's fraud here you have to either make the receipt or the trustee receiver as well which they can or they could appoint a separate receiver whose job would be equity ok he would look to see did any bad

acts occur was there fraud and could he recover funds in a way that a bankruptcy trustee can't because you argue that once it's in this situation of bankruptcy not only can i trustee recover funds for victims from third parties you know you can't the trust you can't write that so that could only as well as back money that so to the dead company but not to the. other end of the global what was that that's right so in the case of made off for example mr pickard the trustee has tried to sue j.p. morgan he's tried to sue other banks and say look you knew what was going on here you should contribute to repaying the victims unfortunately each time he's been shot that in fact should break off his limited his ability to go back in time and claw back money even in cases where he can do two years the made off fraud went on for over a decade so the paper sees a very limited venue this is what people have to realize and the one time when you can go to federal district court and get relief is if there's fraud and people

don't understand this. because that asked for it is something that everybody seems afraid to utter these days they were laid out a senator usually the actual race it looked on course one biggest fundraiser for barack obama right something we talk about a lot on the show so you think those connections have a role oh definitely because it what he did in mismanaging that firm in our business is a straight up felony count sorry and others live thousand dollars odd well and they should be prosecuting him in my opinion but unfortunately barack obama is playing the role of the stooge to the large banks and he's going to let them all go by running out the clock there's a five year statute of limitations so most of these claims will have to see what happens with that i want to bring up there's another point that you make and that's working against victims in these bankruptcy laws and that's changes to the safe harbor laws in two thousand and five for explain why this is kind of the second factor here and also didn't banks have a hand in lobbying for these changes totally the banks got everything they wanted in two thousand and five and what they've done is said well we have systemic risk if you subject the bank to the automatic stay in bankruptcy in other words if you

force them to wait for the bankruptcy court to make the ruling so they have a pass and what this means is j.p. morgan can facilitate fraud in a firm like him afloat bill and they get no hindrance whatsoever they can just go about their business and the victims of that fraud can not go after j.p. morgan because safe harbor laws mean that if you have customer money you don't have to give it back as long as you didn't think it was you know it was customer money when you bought it or when i was again thing here is that j.p. morgan is a secured credit or ok they made a margin call on m.f. global m.f. global gave them the money that belong to customers and j.p. morgan even asked they wanted to rewind it a letter that i ever got never got it so i think it was incumbent on j.p. morgan to say wait a minute there's something wrong here and keep in mind they're clearing for this firm and they know what the firm was doing right and i want to get to the bigger picture here because because the conclusion you draw from these kind of two factors that the trustee can't get money from that's their parties also creditors are

protected by the safe harbor law you come to this conclusion which is the. is this as a result of these two defenses working in tandem today financial institutions can aid frauds such as made off at m.f. global to mention just a few without being brought to task in civil proceedings and once the perpetrator of the fraud files for bankruptcy the individual victims often are left without any means of seeking redress and the bad actors among management and other customers literally walk away so i guess i purchased want you to explain how you believe financial institutions have aided frauds in these cases well if you're the bank that's financing a broker dealer to clear all their trades you're financing their assets so by definition you have a duty to know what they're doing with the case of m.f. global you have this sleepy little company that used to just execute on behalf of customers all of a sudden they start trading for their own account they have a raise to the additional capital so where were they getting the money to support

all of this they were getting it from their customers so in my view when you saw him of global start to convert retail accounts and some of their subsidiaries into accounts in the parent broker dealer this was kind of a hint that there was a problem this was back in august of last year that allowed them to steal that money and i think financial institutions should have known about. delegate on this because j.p. morgan also looked to buy enough of us and they did massive amounts of due diligence and if they're already had all the collateral remember a broker dealer is financed they're not funded they don't have a deposit base of cash a broker dealer always has to go to a bank to finance or assets the bank has to know what's going on is part of the credit process you can say well i didn't know and just begs cruelty to say that nobody at j.p. morgan realised that this tiny tiny broker dealer was in trouble i really think they did know they were in trouble they got their money out and now they say fine we have no responsibility to wash our hands of it and the law allows that so then the question becomes will there be more m.f.

global's will there be more made offs. and because bankruptcy laws are changing that i know of that's right this same pattern will repeat where victims don't have any more right here is an interesting case i think if victims were more aware of their rights under current law i've actually proposed changes to the law that would help this but even today if you know what to tell your lawyers that if your lawyers know the law they can go to a federal judge and get a receiver and i'm not sure what would happen because if you had a receiver in the m.f. global case it might be that the person could claw back the funds so then as you wouldn't go to the front of the supreme court you need a receiver and addition to a trustee and a trustee is what i did and gave another example f.d.i.c when the f.t.c. takes over a bank one of the few ways they can recover funds if there's a deficiency in other words if the posit fund is taking a loss as a result of the bank's failure as they sue officers of directors that's what a receiver does because they have the power to go after third parties and say wait a minute you were negligent you whatever x.

you committed caused a loss to the f.d.i.c and as a result we're allowed to go after you so that shows you how powerful receiver could be and it's literally the difference of a client knowing we need to tell your lawyer my attorney right now the judge we want to receiver this is fraud we believe that's right and that's your one exemption because generally the courts won't allow a bankruptcy court or any of these inferior tribunals to get into their turf which is judgments about equity property that kind of thing but this is the one case where it's absolutely essential if you want to fight fraud and you know what this is good advice for anybody listening because it doesn't seem like there's a lot of movement on the regulatory front that would make people more resigned to feel that their money is safe and a broker dealer if you can get it stolen from m.f. global then what right you know where well that's that i have an article about this up and zero hedge that we originally published on the u.s. to show the risk website but i felt it was so important i wanted to put a green version of the article up there for people yeah. it's a great piece and when we come back i want to talk to you more about j.p. morgan and some other issues will have more with christopher whalen author and

senior managing director at tangent capital partners. still ahead we've been talking about generating domestic economic growth so how about some advice for former u.s. president george w. bush no takers well like it or not he'll be offering his two cents this summer we're going to give you our three cents on his latest endeavor first your quote closing market numbers though. we just put a picture of me when i was like nine years old she told the truth. i confess and i am a total get over friends that i love driving hip hop music and. he

was kind of the jester. i'm very proud of the world with its place. you know sometimes you see a story and it seems so. you think you understand it and then you glimpse something else here's some other part of it and realized everything you thought you knew you don't know i'm charged welcomes a big picture of. what drives the world the fear mongering used by politicians who makes decisions to break through that sort of to be made who can you trust no one who is you know of you with a global machinery see where we had

a state controlled. capitols school sessions when nobody dares to ask we do r t question more. welcome back we've been talking about fraud and if you didn't notice j.p. morgan has a role has a hand in the m.f. global story in the made off story and of course we have this latest london whale trade gone sour the question comes up is there anything j.p. morgan doesn't have a hand in these days but then when you talk about regulation about making sure that banks don't engage in proprietary trading reining in risk is there an unintended consequence that well let's look at what chris whalen has to say as well j.p.

morgan spends his tail as an outlier and the media complies in this task perfectly in reality this is really how a lot of the market generates profit the as not only will implementation of the volcker rule have no impact on the risk taking and true risk exposures of the largest banks but the reduction with put it in many markets in the short run may actually cause the next systemic crisis. i don't know we're going to ask about that with chris whalen senior managing director at tangent capital partners here author of inflated how money and debt built the american dream chris whalen you say the volcker rule could actually cause a systemic risk because these banks are so big so responsible for liquidity. i hear ya i'm sitting here i'm going out come on all i want is these banks to stop trading with depositors money to stop making these bets to stop putting taxpayers on the line so really explain to me why this could be a risk well half of j.p. morgan's profits come from credit or betrothed just like the whale it's

a very tough you're saying here right and remember half of j.p. morgan's business is not funded off deposits it's funded off the bond market ok so the whole complaint about them using deposits to trade derivatives i think is a little bit suspect also keep in mind they lose more money every quarter charging off bad loans than they lost on this trade and the unit is overall profitable so i look at j.p. morgan and while i would like to see changes in the risk taking and everything else i think this is a big tempest in a teapot about the fitting description to use because that's what jamie dimon called it well but it's true because i think he had to come out make this strange announcement after the close last week we get to see mail says we're having a conference call but i really think it's been blown out of proportion should this whale have been doing this trade no i think he messed up but it was it had these guys who were swinging for the fences as they usually do you know they as i say they generate about half the profit inside j.p. morgan every year not just this investment group but generally derivatives

structured finance all this stuff so if you say stop doing this be careful what you wish for because you're going to turn j.p. morgan into a killing you know what is wrong with that why can't banks that are used to ensure that are at j.c. insured and that used upon this and i know you say that there is out there other means to fund it but that at the end of the day you know it's a positive why can't we stop them from doing that when you can and but the volcker rule is really badly thought out if you want out there because i mean really there because you know let's look at my more a lot of banks j.p. morgan so no longer going to trade in those markets we've taken about a third of the liquidity out of the bank securities market little banks the big banks on their paper so now they're told they can't trade anymore they were effectively market makers for a little bit. yes that's all good well there's still a market making print provision in the bill for this kind of stuff because they own the paper the big banks like to own paper from smaller banks because they know that their correspondents high yielding stuff they like it but the other thing is keep in mind when you have

a bad day in the stock market you're tim geithner i don't want to insult you but let's say you're tim geithner and you would like the banks to come in and support the s. and p. in the afternoon before the close because of the market closes down really badly it's bad for the next day well into the volcker rule we can't do that you've taken the biggest desks in the market out so i think if you want to do this let's go back to glass steagall but you're saying just separate operate the house will have a broker dealer that can engage in speculative activity execute for customers who want to trade stocks and bonds right and then over here we'll have the narrow bank right that has deposits and loans and does other kinds of transactions only for customers so you basically physically have to divide the capital and the conflicts and then you're ok i am with you there volcker rules a half measure and it's going to cause problems ok well i hate to hear that but i wish there was more of a call for glass to go into to go further well we could get there you'd be surprised that we have another systemic break in this country which i think is likely then you may have the political catalyst as we were talking about before

that says yes we need to do more unfortunately that's a high price to pay to wait for another crisis that's on the market she works well let's talk more about democracy because right now we have a few diplomatic big events going on we have the g. eight we have nato this week and so this brings me to the situation that the u.s. is an economically because you pose a really interesting point which is that you think that there is this choice on two on two ends of the spectrum between war to do is the economic growth when production is not adequate or debt and inflation and that navigating between these two extremes is really the challenge so why do you think the u.s. is in this situation well if you go back to world war two we equated the dollar with gold and on that basis you were able of fuel to grow. the global economy rebuilding europe rebuilding asia and we did fine until the eighty's when growth really started to slow down in the u.s. we used monetary policy to lower interest rates progressively it's like a staircase if you look for me is to today now word zero we also use deficit

spending to goose consumer activity housing all sorts of things policy was used to generate growth but was this real growth because it see the difference between real growth i'm a little grown a lot of it wasn't rolled across the keynesian faction says well we just have to stimulate consumer purchasing power that's the most important thing conservatives say no you need industrial wealth you need to grow real wealth that's the basis for a stable economy so by going the liberal route the neo keynesian school if you will we're in boom and bust and i think you have to find a time rob like and love their wars for public use what you want this partisan ok you know what i work for jack kemp years ago we used to argue about deficits in the eighty's you actually got a good bang for the buck as a politician if you increased deficit spending you got more job growth today we get almost none would that's a good point that we were talking about has the low hanging fruit been picked right with deficit spending you don't get that kind of return that maybe that you see that by doing that right from the perspective we've run out of runway and this

whole notion that you can use policy in the short run to really stimulate true economic growth is false and what happens is consumers pay for it at the grocery checkout counter because inflation's much higher than the fed would like to admit and so even though we have supposedly nominal growth because of all of these short term expedients in washington the consumer is getting killed and that's the key thing of all and one thing before we go that i want to make a point of is that will this stop is there anything to stop it because you have made the point that you know hard money would never exist in your view in a democracy because politicians will always be pressure to continue doing everything they can in order to provide growth so then are we just going to as a country spend. elves into oblivion with knowing the results i think until we have a little bit more of a national discussion about what we want for the future do we want to stable boring growth pattern which may be as it is exciting to the political class or do we want to go more boom and bust i don't think we could afford more boom and bust the

carnage just from the shrinkage we've seen in the real estate market the housing market generally employment we've lost labor mobility because people can't sell their homes you know there's a lot of really horrible horrible costs associated with this very volatile policy mix so i think we need to try something different yeah we'll have to see if there's any political will for that because we're going to have to leave our discussion there for today thank you so much that was chris whalen he is author and senior managing director at capital partners. have a couple minutes let's wrap up with the loose change dimitri and we talk

a lot about vice and the boost that vice gets when the economy is in tough times but it seems that things may be really bad for one vice profession in paris here's a here's a cameo by a famous american there. american burlesque routine ditto evelyn tisa was in paris again for two weeks due at the crazy horse. so the ladies on stage they were dita von teese are on strike at the world renowned crazy horse cabaret which is a fancy name for a strip club strippers say that they're not getting paid enough so does this show that tough times have gotten so tough that even vice isn't benefiting or are they just gotten screwed by their bosses it's not really it was a good friday and slip this is a strike i mean if i was going to see anyone striking. a hard program that's what it would also be very such a strike but look it's not going to be because you're not going to lose but even

customers for strippers all right well there could be actually a verse in the french are you know they lead the charge of the strikes so i you know i'm i applaud this and i may be for their own specific reasons whatever it is of yours out in wages but this could be really good for influence because also look if we're going to strippers and the prostitutes what are we going to do i don't know but we have to credit them for having skin in the game i like that shanon it reminds me of the story last year of the women and that town who were holding out from their husbands being they didn't have a road oh i didn't know i could borrow. ok but it is along the lines of in spain i think that the prostitute said that they were no longer going to sleep with bankers but they were taking a more direct approach the french the french are classy yeah they're taking this class you're kind of you know striking strike a pose literally ok let's talk about this because i want to get to this story before we go back in april former president george w.

bush may be remembered former u.s. president obviously he wished that the bush tax cuts had someone else's name on them well this summer bush plans on giving more economic talking points he is reportedly coming out with a book with economic advice the man who did this is going to tell us about economic advice. ok really about this story is there's an excuse to play there's that amazing video which when we talk about the bernanke you could turn indicator talk about the diamond we've been going through could turn indicators this guy is the only to make contrarian indicator ok here's another thing about economics he was thinking about the iraq war saying this is great for the economy and all his buddies on the right on the far right down the aisle cause repeating the same garbage this will be great for economic growth because single handedly sent the u.s.

economy straight into the gutter he literally crash landed and blew up the u.s. economy ok with his deficits his wars and everything else so i'm shocked this is a joke in my opinion who are told this guy that this would be a good idea is remarkable it's obvious to some it's a mole inside the bush family organization no i think it's probably some publicist it said mr publisher that's going to that's going you know the bush tax cuts are going to be really in the news because they're set to expire and this is going to be a huge debate that everybody's watching so maybe if you write a book you can kind of you know get some leverage on that topic and get some book sales horrible because we're ok that's true well this is a home for the this whole over the tax rebate because of the taxes that are the problem well those. paid for what does it mean to be not to pay for tax because not paid for that's that's that's that's you know that's the left's lingo oh my god i have not heard any i'm going to go how do you have taxes that are paid for i don't know dimitri our audience is going to have to figure it out a lot of the time love what i just does that that's our show thank you so much for

watching make sure to come back tomorrow in the meantime you can follow me on twitter at lauren lester give us feedback on you tube dot com slash capital account and have a great night. wealthy british style. sometimes. you do right now. markets. come to find out what's really happening to the global economy with max concert for a no holds barred look at the global financial headlines tune in to kaiser report. download the official location. called touch from the.

life on the go. video on demand teasing blindfold costs and feeds now in the palm of your. question. please.