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Critical Assessment of the Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Reform Bill is regarded as one of the largest financial reform bill in the past 70+ years that addresses the systemic risks and stability problems associated with the banking and finance industry. It addresses “too big to fail”, regulatory issues, expanding the responsibility of the Federal Reserve, implementing a variant of the Glass-Steagall (Volcker Rule), and increased transparency across the industry.  Although this bill is intended to do some good, it has some shortcomings…

Dodd-Franks Wall Street Reform Act: Building A Better Trap. Image from http://www.politicsdaily.com/2010/08/08/dodd-frank-wall-street-reform-building-a-better-trap/

Below is an excerpt from “A Critical Assessment of the Dodd-Frank Wall Street Reform and Consumer Protection Act” on http://www.nakedcapitalism.com:

“The shortcomings
That said, from the standpoint of providing a sound and robust regulatory structure, the Act falls flat on at least four important counts:

  • The Act does not deal with the mispricing of pervasive government guarantees throughout the financial sector.

This will allow many financial firms to finance their activities at below-market rates and take on excessive risk.

  • Systemically important firms will be made to bear their own losses but not the costs they impose on others in the system.

To this extent, the Act falters in addressing directly the primary source of market failure in the financial sector, which is systemic risk.

  • In several parts, the Act regulates a financial firm by its form (bank) rather than function (banking).

This feature will prevent the Act from dealing well with the new organisational forms likely to emerge in the financial sector – to meet the changing needs of global capital markets, as well as to respond to the Act’s provisions.

  • The Act makes important omissions in reforming and regulating parts of the shadow banking system that are systemically important.

It also fails to recognise that there are systemically important markets – collections of individual contracts and institutions – that also need orderly resolution when they experience freezes.”

(excerpt written by: Viral Acharya, Professor of Finance, Stern School of Business, New York University, Thomas F. Cooley Professor of Economics, Stern School of Business and Faculty of Arts and Science, New York University, Matthew Richardson, Professor of Applied Economics, Stern School of Business, New York University, Richard Sylla, Professor of Economics, Stern School of Business, New York University and Ingo Walter, Seymour Milstein Professor of Finance, Corporate Governance and Ethics at the Stern School of Business, New York University. Cross-posted from VoxEU)

Thus, even with the passing of this new reform act and all its good intentions, there probably won’t be a huge, sweeping paradigm shift in the way that banking and business will be done in this country.  Instead, it will just impede some parts of banking business in Wall Street, but ultimately allow for new ways for banks to make sure they can continue to make their exorbitant profits in high risk environments with lack of regard for the rest of the consumer base.

Read the rest of the article here

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More Forensic Evidence of Gold & Silver Price Manipulation

The following is a summary of an article that was taken from Market Force Analysis’s website where they did a simple linear regression comparing gold and silver for the past 7 years.  The study has definitely confirmed what most traders have known for these past few years…that gold and silver were heavily correlated in these past 7 years, but the data also brings up suspicion that this relationship between gold and silver is actually heavily algorithmic due to the high r-squared of > 0.91 for the past 3 yrs and an r-squared of 0.96 for 2003-2008…almost perfect correlation for two metals that have different functionality and market uses.  It’s a heavily programmed trade that does not correlate the fundamental pricing of the commodity itself, as both metals are heavily “suppressed” by the industry’s heavy algorithmic trading schemes. The regression below displays the cross-plot between silver and gold.  The black line is from 2003-2008 and the green line is from 2008-2010.

Figure 1: Cross-plot of Silver versus Gold 2003-2010 (from More Forensic Evidence of Gold & Silver Price Manipulation by Adrian Douglas of http://www.marketforceanalysis.com)

The current trend that we are seeing in silver might be a first sign of de-leveraging (well, actually de-correlating) from gold, and might finally make for a better trading opportunity than gold.

Read the article here.