God did not instruct Noah to build an umbrella.
However, an umbrella is just what the European Union (EU) seems intent on building in response to the next global financial storm. In response to the devastation caused by the Great Recession and its aftershocks, the EU is set to call for a global financial transaction levy. Such a measure may also be added to calls for taxes on bankers' bonuses, such as Great Britain's proposal to take back 50% of such bonuses in excess of about US$40,000.
Having caused much of the present carnage, there seems some fairness in asking the world's banks and brokerage firms to chip in their fair share towards the rescue effort. Nonetheless, my concern isn't so much with the levy proposed by the EU but with the use of the funds so derived. Europe has a penchant for doing things on a grand scale amid much high-minded assurances - but before we accept the Old World's wisdom too blindly, we should recall that such proffered idealism comes from nations that started disastrous wars, sat idly by in the face of ethnic cleansing, and gave the world centuries of brutal colonialization.
In my September 2009 Forbes column: We Need a Wall Street Fraud Fund, http://www.forbes.com/2009/09/11/commentary-singer-fraud-intelligent-investing-fund.html, I stated:
One proposal I urge is the creation of a Fraud Fund through which defrauded investors would be able to obtain full payment for their losses. And please note that I'm limiting this fund to repaying victims of fraud, not those who made foolish bets or lost money after taking a calculated risk. Victims of fraud--particularly fraud that should have been detected earlier by Wall Street's regulators--deserve more from Wall Street than its pity.
I would create a multibillion-dollar restitution fund for all Wall Street victims of proven fraud. You could impose a fee on all trades and public offerings, and add an annual fee on all Wall Street firms. As to Sen. Schumer's proposal, I would redirect it. I would take all of the SEC funding he has included in his proposal and earmark those dollars for the Fraud Fund. After all, what would most defrauded investors prefer? Would they prefer knowing that the SEC has spent its fines and fees on expanding its ranks or that those same dollars are now the ultimate guarantor of America's financial markets? I think restitution will trump lousy regulation every day.
As such, my initial concern about the EU's proposal is that the collected funds will be earmarked for government (and international organization's) coffers - and will likely be foolishly spent on White Papers, blue-ribbon panels, seminars, and, worse, will inevitably serve as payoffs to cronies and corrupt officials. Sadly, this is an international affliction. As I noted in my Forbes column:
Putting more dollars into the hands of incompetent cronies and clueless regulators fuels corruption and never solves the underlying problems. This mess was never about funding. It was about incompetency. Putting more incompetents on the payroll doesn't engender solutions. Funding more dubious regulatory initiatives doesn't accomplish reform.
Sadly, I have no confidence whatsoever that the EU will spend wisely the funds it collects from a Tobin Tax or a financial transaction fee or a punitive Bonus tax. To the contrary, such revenues will likely be nothing more substantive than a boondoggle for corrupt politicians.
Mr. Sarkozy who is a leading proponent of the EU plan, flails against his whipping boy of the so-called Anglo-Saxon financial history. He makes some valid points, but, on the whole, his thesis is a tad strained, if not demagogic. On the other hand, let me remind Mr. Sarkozy of his own nation's dubious past: When the next financial crisis comes, and it will, those proposed EU taxes will likely have been spent on building the economic equivalent of a Maginot Line, whose defenses will prove illusory and quickly overwhelmed.
Amassing an international rainy-day fund administered by bureaucrats and economists will result in no more efficient response than that witnessed during Hurricane Katrina. A one-time levy to fund an international Fraud Fund, along the lines of the one that I proposed in my Forbes column, would seem to be a far more prudent first step than what I see coming from the EU. Let careless and foolish financial institutions fail BUT ensure that restitution is readily available to compensate all victims of any provable fraud.
Bill Singer of RRBDLaw.com and BrokeAndBroker.com is a veteran regulatory lawyer; an outspoken critic of ineffective regulation; and a staunch advocate for the rights of smaller firms, individual registered persons and defrauded investors. Bill regularly appears as a commentator on television and radio, and is frequently quoted in the press.
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