The Death of Price Signals and the Birth of a Faith-Based Financial System
Bank of England Governor Paul Tucker faced UK lawmakers over the Barclays LIBOR scandal today. He said that the memo documenting his 2008 phone call to Barclays' CEO about the manipulation of Libor was misunderstood. Meanwhile, rumors circulate that the Barclays board may be trying to separate bank's investment-banking business. The Sunday Times reported the story, but it has been refuted in other press reports, too. Simon Mikhailovich, Co-Managing Member, Eidesis Capital, talks to us about the role derivatives play in the LIBOR scandal and in enabling bad decisions at systemically dangerous banks.
Meanwhile, Spanish yields rose above 7% today, a critical level deemed unsustainable. As eurozone finance ministers meet again, investors continue to display skepticism that the EU can solve this crisis. Is this because the financial system today is a "faith-based initiative"? Simon Mikhailovich will explain what happens once faith is lost.
And, if you think of the 'too big to fail' banks as a cartel, you may be interested to hear about the actual criminal drug-trafficking cartel Bank of America has gotten mixed up with, as alleged by the FBI.
Our guest, investor Simon Mikhailovich lays out how his view of why derivatives have been "disruptive technologies", fertilizing leverage and risk in the financial system and a web among banks that can't be undone without immense pain. We discuss these disruptive technologies and their role in allowing the expansion of too much debt that can never be repaid, which could come to roost now in the EU sovereign debt crisis. Mikhailovich breaks down how credit default swaps have been used by banks to hide risk and expand leverage in a way that makes bailouts needed to keep it going (b/c if one bank goes down they can all go down due to counterparty risk). We talk about the lack of reserves and the risk present even in "risk free" money market funds (a $2.5 trillion industry in the US). Our guest breaks down the ways in which he believes the financial system is now a rigged game based on too much debt with manipulated price signals, the Barclays LIBOR scandal being the latest evidence. He discusses the financial system as a "faith-based initiative," which works as long as people believe in it but as soon as they don't, is pandemonium. He lays out his thesis for investing in assets outside of the financial system, physical gold being the main one.