Pete Kendall's Socio Times: A Socionomic Commentary

March 31, 2008
Paulson Plan Begins Battle Over How to Police Market
Amid Crisis, a Bid To Shuffle Powers
In a sweeping proposal circulated over the weekend, Treasury Secretary Henry Paulson slaughtered a number of Washington's sacred cows, proposing to merge or eliminate institutions of long standing including the Securities and Exchange Commission, and to create a controversial new role of supercop for the Federal Reserve.

In an interview, Mr. Paulson said the regulatory system is broken, a growing sentiment in recent months in Washington as each of the nation's financial watchdogs failed in a different way to prevent the foreclosure crisis and credit-market turmoil from spreading. "We need regulation, but if we have it, it should be just structured in a way that it has some way of being more effective," he said. "Everywhere I look, I see the plumbing hasn't changed to meet the realities."

Big crises, from the Panic of 1907 to the Great Depression to the 1987 stock-market crash, tend to give impetus to perennial efforts to reform U.S. financial oversight. The current system has developed over more than a century, and critics have long complained that too many agencies have overlapping jurisdictions and leave too many areas exposed.

Even if only parts of the Treasury plan see the light of day, they could reshape how the government interacts with Wall Street banks, Main Street banks, insurance companies, hedge funds and other institutions that grease the wheels of the nation's economy. While the Fed would gain power, the Securities and Exchange Commission could lose some or even all of its authority. Regulators at the federal level would significantly increase their clout at the expense of state regulators.
The Wall Street Journal

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Winds of Reform Are Way Too Strong for a Short-Term Top
Category: UPDATES
By: Pete Kendall, March 31, 2008

Bear markets bring recrimination. Practices that were routine during the bull market suddenly become vilified. Investors are itching for a fight. Soon, charges of manipulation and the need for reform will be flooding out. This promises to be a huge mushroom cloud.
The Elliott Wave Financial Forecast, April 2007

cap buildingThis month’s issue of  The Elliott Wave Financial Forecast covers a big increase in the use of the phrase “since the Great Depression.” There it is again on page 1 of today’s  L.A. Times: “The most sweeping reform since the Depression is proposed.” 

“I think the timing is great," said Treasury Secretary Henry Paulson said. He’s right, the timing is perfect as it marks the start of a huge downtrend in social mood with an exquisite illustration of government’s propensity for recognizing a new mood with measures designed to deal with the excesses of the preceding trend. This is an important signal as it is exactly what EWI called for in the wake of The Great Mania. Here’s how August 2, 2006 Socio Times described the dynamic on August 2, 2006: “Government literally waits for the horses to exit the barn to slam the door shut.” At that time, we noted a belief that hedge funds “could contribute to a 1929-style financial debacle,” but we said nothing would be done about it until after a big peak was in place. On August 2, 2006, “Peak Experience Pulls Plug on Hedge Fund Reform” (click to view the whole entry) Socio Times said:
In other words, despite an overwhleming sense of foreboding, government can't do anything about a hedge fund blow up until after hedge funds blow up. The situation is developing into one of the all-time great examples of how government operates as “the ultimate crowd.” With the wide range of leverage bets in many of the riskiest financial markets, any government legislation designed to forestall or mitigate hedge fund collapse will come way too late (and probably do more to dampen investment than effectively control future problems). It’s a strictly psychological dynamic, but it is unfolding so clearly now that it seems like a physical law.

In a telling aside, Paulson notes that his plan for the reform of the financial industry won’t become law any time soon. "With very few exceptions, most of this blueprint should not and will not be implemented until after the present market difficulties are past." He’s probably right as the historic pattern is for reforms to take effect after the bear market that produces them are over. The Securities & Exchange Act of 1933, a prime example, came one year after the low of 1932 while a more recent bear market incarnation, the Sarbanes-Oxley reforms of October 2002, took effect as stocks were bottoming in 2003.

Another aspect that we mentioned in April is a post-peak surge in charges of manipulation. A little deeper into the financial sheets, we find that allegations of fraudulent or government-induced price supports are also starting to proliferate. In England, the Financial Services Authority, Britain’s financial regulator, is launching an investigation of trading patterns in which traders are reputedly driving down bank prices by planting false rumors. The FSA is seeking legal changes that will allow it to “come down hard on anyone who deliberately tries to manipulate the market for personal gain.” In Australia, where hedge funds reputedly manipulated stock prices, brokers face fines up to $1 million for serious market manipulation under new securities regulations. In the U.S. the Securities and Exchange Commission is looking into a surge in Bear Stearns’ put options, bets that Bear's share price would drop, that hit right before it crashed to less than $3 a share on March 17.  We’re also hearing more and more whispers about the Presidents Working Group on the Financial Markets, a.k.a. The Plunge Protection Team. And don’t look now but a trans-Atlantic version appears to be under construction. The U.S. and England are teaming up to create a body of senior Treasury and regulatory figures. Regulators have been “seized by the fact that we need to do something to respond to the financial market turbulence, that we need to generate a shared agenda.” The whole idea is to keep prices from falling; but the farther stocks fall, the more convinced people will become that governments’ agendas are having an ill effect on prices.
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