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Friday, June 24, 2011

Post Financial Crisis Regulatory Reform Encounters Resistance Everywhere

By Amy Erixon, Toronto

This week's finger pointing game returned to Greece, with the new revelation that the high levels of exposure to Greek debt at the French and German banks may be insured by US and UK banks who, in turn, have purchased credit default swaps from US based hedge funds who may not be good for the possibility of 240 billion Euros of anticipated defaults. All of this serves as a reminder how complicated and global these issues and instruments have become. Even assets that are relatively straightforward to value, such as mortgages and properties have valuation metrics that are being tested by quantitative easing on one hand and regulatory uncertainty on the other.

The most recent issue of Avison Young Global Capital Market Newsletter highlights reform efforts and setbacks faced by German regulators in their efforts to put more conservative controls on financial instruments backed by real estate sold to the German public. The initial regulatory proposals spooked investors about possible limitations on liquidity and in doing so triggered the very thing it was trying to head off - a run for the exits.

Those of us schooled during the last century can't help but notice with alarm the collapse of confidence in the government's ability to stabilize the markets. I for one find that it is impossible to take seriously the finger wagging by US officials concerning everybody else's fiscal situation when the US government continues to borrow staggering sums of money for current activities, poo poos the need to address taxes, and sweeps under the carpet mention of the unfunded (but legally owed) future obligations such as public sector pensions, social security and Medicare. A recent and well researched article in The Globe and Mail by Neil Reynolds, June 22, 2011 suggested that prominent US economists, such as Laurence Kotlikoff at Boston University put estimates of US unfunded liabilities at $200 trillion, or more than $1 million per US household. This is nothing short of astonishing.

Which leads me back to what I was taught in school. Investing is not a form of legalized gambling. Only lend money to businesses and people who have a sound plan to pay the money back. Borrow conservatively and stagger maturities. Focus on increasing income, that's where the money is made. Those were the days.

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