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University of San Diego Professor of Law and Finance Frank Partnoy, along with Pulitzer Prize-winning Pro Publica reporter Jesse Eisinger, say in the January/February issue of the Atlantic magazine that even the most discerning analyst cannot comprehend the financial reports of the nation's large banks. The 2008 financial crisis resulted from a "lack of transparency" that is still rampant today. "Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash," say the authors. "Large global banks have been accused by U.S. government officials of helping Mexican drug dealers launder money" as well as funneling cash to Iran. In opinion polls, fewer than 25% of people have trust in the banking system. The authors quote a former Federal Reserve board member who says that banks' official disclosures obfuscate more than inform, "and the government is not just permitting it, but seems to be encouraging it."

The authors then go through Wells Fargo's annual report, and find it filled with inscrutable references and opaque footnotes. They went to Wells Fargo with questions, and the bank told them to read the annual report.

"As trust diminishes, the likelihood of another crisis grows larger," write Partnoy and Eisinger. "The next big storm might blow the weakened house down." And then they zero in on the basis of most corporate fraud: "Clever bankers, aided by their lawyers and accountants, can find ways around the intentions of the regulations while remaining within the letter of the law."

Comments
2

Not just too big to fail...too big to tell the truth.

I foresee another collapse in the near future, but this time the government won't have anything to bail them out with.

Don, what is the hedge against this? Bullion? Real estate? Guns?

Jan. 31, 2013

Fred: I fear there will be another financial collapse greatly because of banking industry shenanigans, but I can't tell you when. How to play it? Gold pays no income; you only win if its price goes up. Real estate requires leverage, and depending on what kind of mortgages you have, the inevitable rise in interest rates could hurt. Bonds are a real risk unless you buy the very highest quality with short and intermediate maturities, and then you won't get a decent yield. Junk bonds are a bubble. Cash pays almost no interest. I'm still buying blue chip stocks yielding 4% or more (mostly utilities, pharmas and oils, along with some pipelines, etc.) Stocks may do better than other asset classes in a collapse. On the other hand, I could be handed my head. Best, Don Bauder

Jan. 31, 2013

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