SECTION TWO, PART ONE

Children of a Lesser God: One of the intriguing things about the wash-up of the last few years is the capacity to try to shift blame/ responsibility to others to cover up for failings. The concept is not unique, unfortunately, because to admit some form of culpability either suggests indifference, incompetence, lack of understanding about the true nature of the occupation, or lack of professional gravitas. One or all of these may apply, but the blame shifting allows some economic effect to be passed to those who don't know better, and they don't know how to respond to the impost on them: they become children of lesser gods for the exercise of the impost. I'll focus on a US example next week, and a Euro special the week after, but let me give a home grown example to further the cause. Australia has its own special called Trio Capital...as close to a Madoff moment as we could deliver. [As an initial comment, can we climb over "how well" Australian did during the GFC....I do not think two cash splashes, and grossly ill-devised pink-batts insulation, and schools' canteen building programme, saved the economy. How about ginormous cash splash in China, and totally mis-understood bank guarantee, wholesale and retail, without proper guarantee payment, or bank-conscience for the taxpayer supported largesse, were the true heroes]. Australia's "Madoff" has some particular resonances. A quick re-cap. Trio offered some range of financial products to a number of market segments. It offered some pooled superannuation funds ( which are regulated by APRA ) , and also offered some pooled investment vehicles, called Managed Investment Schemes, which are available to the general public ( the licensing of these are regulated by ASIC ) . Both of APRA and ASIC have received prior references in these pamphlets: some laudatory, some more like lavatory. Superannuation/pension funds in Australia are divided into the institutional funds, under APRA's guidance; or effectively private individual arrangements, called Self Managed Superannuation Funds(SMSF's). These latter ones are really not regulated, but rather fall under the umbrella of the Australian Taxation Office, which has extremely rudimentary oversight of this ( now ) huge body of monies. It gets somewhat complicated, but let's reduce it to the fundamentals...... Trio had a fund which had fraudulently overstated market values. No matter that it involved Bear Stearns securities. BS went into pathetically terminal decline in February and March 2008, and arguably acted as the bell-wether for the GFC with its leveraged funds immolation in July 2007. ANYONE in the business would have doubts about ANYTHING with Bear Stearns. Well, maybe not everybody.....APRA and ASIC? Well, when did the regulators start to really pull Trio's chain? What, one and a half years later in late 2009, and then because of a whistle-blower.....it was only around $200 million; chump change in the oversight of a business which has the same value as the nominal economy. Who pays? Well, quaint rules allow fraud to be re-compensed for APRA regulated entities, but not for ATO regulated entities. So, institutional fools were made whole, but individual fools were not. BUT THERE IS MORE. The institutional make-good was by way of a levy on ALL APRA REGULATED superannuation funds, whereas the individual SMSF's investor lost the lot. Let's recap again: some institutional punter invests in something fraudulent, and most superannuation members will bear this totally hidden tax ( ? Wonder if they think this is fair/if they knew to form a view? What happens if it was a really big fraud, where the impost becomes very significant?). Some individual investor invests their superannuation in Trio, and they dust the lot. Obviously, the policy principle here is: individual care/individual beware. In Insto land, the regulators worry about their tardy culpability, but have hidden taxation powers. AMAZING !!!! No amounts of Parliamentary enquiries, or Departmental Review hoboken can cover this morass. There was only one fraud, but look how many ways the financial cost can be spread! Now, where did we,the population, agree to this style of bespoke regulation, you win or lose through powers/responsibilities that you cannot fathom, let alone influence.