Friday, October 17, 2008

Morgenthau: Too Much Money Is Beyond Legal Reach

Robert Morgenthau, a legend among U.S. crime-fighters, had a most impressive editorial in the Wall St. Journal recently. It kind of reinforces some of the things we have been saying. Here are a few excerpts.

"A major factor in the current financial crisis is the lack of transparency in the activities of the principal players in the financial markets. This opaqueness is compounded by vast sums of money that lie outside the jurisdiction of U.S. regulators and other supervisory authorities."

Indeed. And he adds:

"The $700 billion in Treasury Secretary Henry Paulson's current proposed rescue plan pales in comparison to the volume of dollars that now escape the watchful eye, not only of U.S. regulators, but from the media and the general public as well.

There is $1.9 trillion, almost all of it run out of the New York metropolitan area, that sits in the Cayman Islands, a secrecy jurisdiction. Another $1.5 trillion is lodged in four other secrecy jurisdictions.

Following the Great Depression, we bragged about a newly installed safety net that was suppose to save us from such a hard economic fall in the future. However, the Securities and Exchange Commission, the Federal Reserve System, the Comptroller of the Currency and others have ignored trillions of dollars that have migrated to offshore jurisdictions that are secretive in nature and outside the safety net -- beyond the reach of U.S. regulators.

We should have learned a long time ago that totally unsupervised markets, whether trading in tulips or subprime mortgages, will sooner rather than later get into trouble. We don't have to look back very far in history to understand this."

He mentions something else we have studied:

"Most recently, two Bear Stearns hedge funds, based in the Cayman Islands, but run out of New York, collapsed without any warning to its investors. Because of the location of these financial institutions -- in a secrecy jurisdiction, outside the U.S. safety net of appropriate supervision -- their desperate financial condition went undetected until it was too late."

These are not the only jurisdictions involved - Jim Stewart's excellent article in a recent edition of Tax Justice Focus looks at the Bear Stearns link with Ireland - which has allowed hedge funds to set up there, as long as the documents (which can run to hundreds of pages) are submitted to the regulator by 3pm the previous day.


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