Endangered status might be beneficial

By DAVID MOON, Moon Capital Management, LLC
January 6, 2013

As we all learned from watching “It’s a Wonderful Life,” banks don’t actually keep everyone’s deposits back in the vault. The financial system only works because we trust that the bank actually has the assets to support the account values reported on our monthly statements. Once an institution or system loses that basic trust it fails.

Cynics and casual observers may opine that the entire financial system is untrustworthy – that the unscrupulous 99 percent of the bankers and financiers ruin the reputation of the rest.

The reality, however, is that the vast majority of the institutions and people who run our financial institutions – both large and small – are honest.

That’s why it is so important to punish those who violate that trust. The more serious the violation, the more serious should be the punishment.

In this area we fail. A recent example of this is the worldwide treatment of Swiss bank and global financial conglomerate UBS AG. The company is certainly not the worst offender, although it is one of the most highly visible.

On December 19 UBS paid $1.5 billion in fines to settle claims that it illegally manipulated the London Interbank Offered Rate (LIBOR,) the interest rate on which most of the world’s loans are based. The Wall Street Journal reported that Fannie Mae and Freddie Mac lost $3 billion from the manipulation.

As Gomer Pyle used to say, “fool me once, shame on you. Fool me twice, shame on me.”

Well shame on us.

The company also recently paid fines for poor oversight of London traders – one of whom hid losses exceeding $2.3 billion.

I can’t even successfully hide Christmas presents at my own house.

It wasn’t just LIBOR the company was manipulating. In the past five years, UBS paid to settle charges that it was rigging bids in the municipal bond market, misleading customers about the riskiness of certain auction-rate securities, and assisting clients in defrauding the Internal Revenue Service.

I have friends who work at UBS. I have a co-worker who was in its management ranks for years. They are good, honest and highly competent people.

The problems reside several levels above them. But a fish rots from the head down.

In a December 20 Wall Street Journal article, a US Justice Department official said the federal government wasn’t pursuing criminal charges against UBS because such a move might endanger the company’s stability.

The stability of that company – and any other that continually flaunts the trust of the financial system - should be endangered.

UBS is only one of a number of banks involved in the LIBOR scandal, but like British bank Barclay’s, it has been among the first to settle with regulators.

I regularly read of people falling prey to Ponzi schemes – either by well-connected managers (think Bernie Madoff) or now disgraced former football coaches (such as Georgia’s Jim Donnan.)

A pension fund group is currently asking US security regulators to more stringently deal with company executives who sell stock immediately prior to releasing bad news.

Perhaps security regulators in this country would be wise to take inspiration from Voltaire who wrote, “…it is good to kill an admiral from time to time, in order to encourage the others.” Figuratively, of course.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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