Are we feeding an organic market failure?
by Anton Keller, Secretary, Swiss Investors Protection Association, Geneva - Sep 28, 2009

Blogging on Jeffrey Friedman's commendable edpage piece "Bank Pay and the Financial Crisis" (WSJ, Sep.25, 2009), Gerald Gruber wrote:  "This is good. This is really good! 'Herd behavior is a danger to capitalism, if the herd bets wrong. But herd behavior is imposed on capitalists [, socialists and ordinary citizens] every time a regulation is enacted -- and regulators, being as human as bankers, can be wrong.' If ever there was a fact statement that should inform public policy, this is one of them. The clear public policy implication from this (and tens of thousands of other examples pertaining not only to banking, but health care, taxation, and on and on) is that regulations should first of all be about policy. An example of the opposite is the 140,000 pages of Medicare regulations applicable to hospitals [and the some 20000 plain-levelling directives, guidelines and other Ukases the thus no-future European Union has served up on the emasculated citizens of its member countries]!"

Also particularly noteworthy, David Brady wrote: "... Here is an interesting approximate fact: In the 1960s the average CEO made about 60 times minimum wage. Today that multiplier is 820. Since barely a dime’s worth of shareholder value has been created in this country since 1997, it is time to abandon the ”greed-begets-riches-for-the-CEO” comp model in favor of something that better serves folks really taking the risk, the shareholders. Require the risk takers to become owners!" Brady could have added that Mao, reportedly, postulated a ratio of 1 to 30, that the Swiss theologian Hans Küng favored a socially tolerable maximum ratio of 1 to 100, and that the China Daily, earlier this year, reported on social and political backlashes on the background of top bonuses paid at Chinese state enterprises and financial institutions in excess of a 1 to 300 ratio (see:

But in retrospect, all these are seen as being "only" important, but more symptomatic than fundamentally contributing factors of the current mess. True, when on April 8, 2007, the New York Times published a special report on executive pay with shareholder- and peer-driven ratios above 600 (Eric Dash, "More Pieces, Still a Puzzle"), I was smelling a rat, confirming my earlier inkling. Started upon the Fed's March 2006 termination of publishing M-3 figures, my inventory of enlightening articles and analysis from all over the world on deficient market mechanisms quickly became a self-feeding compendium under the heading "To the brink and back - Revisiting Das Kapital while some dance on the Titanic" (

Of course, the avalanche which eventually set in motion the current and coming financial tsunamis is seen to be tracable back to the early eighties, when - under the influence of fast-buck bankers, wealth managers and other apprentice-sorcerers peddling such novelties as derivatives and LBOs ( - ill-advised myopic Swiss lawmakers saw fit to abandon time-tested family-father principles ( This was done in favor of such go-go pension funds investment criteria as
(a) the bigger the company the bigger the security (thus squeezing out of the capital market vibrant but "too small" & medium enterprises),
(b) pension fund managers to be prodded to seek "market returns" (thus directly contributing to the eventually global casino atmosphere), and
(c) investments in derivatives to be ok (thus further undermining the capital market's indispensable functions for the real economy in favor of an essentially detached casino operating in a virtual but real havoc-creating world). Coming from the reputedly solid Swiss, these novelties were quickly adopted world-wide.

The next big thing on the way to where we are has also happened - and would most likely recur below the radar of the most sophisticated future regulatory system and street-wise investor - at an unlikely place, namely the U.S. Internal Revenue Service. In response to the numerous newly criminalized market activities, such as anti-tax avoidance measures (, insider trading, money laundering, etc., the IRS sought and found a way to channel back - at an undecent and as such tell-tale fee - into the "white economy" some of the 1 to 2.5 trillion dollars generated in the "black" or thus newly enhanced "underground economy". As pointed out in our recent amicus curiae brief and presented at this year's Cambridge International Symposium on Economic Crime (, the IRS negotiated in 2000 with UBS AG the illegal, yet model Qualified Intermediary Agreement which came into force on January 1, 2001.

Since its inception, some 7000 banks all over the world have thus been turned from representatives serving and protecting their clients' interests into direct agents and tax collectors of the IRS. However, behind the back of the U.S. constitutional lawmakers, the system provides not only for all "U.S. Persons" to be slammed with a withholding tax of 30% of the benefits generated by their U.S. securities, but also of a "backup withholding tax" of 28% on capital for those U.S. Persons whishing not to be reported by their QI bank to the IRS. Confiscatory as it is, in the old times, this used to be called "protection money" which is estimated to gross some $500bn/year for unclear purposes. Citicized notably by Barrons for its market-disruptive effects (Thomas G. Donlan, "The IRS enlists foreign banks and brokers for global tax enforcement",, the deal worked out between the IRS and UBS AG provided for UBS clients to get out of U.S. securities and invest the estimated some $20bn into "UBS investment funds and certain derivative products". Channelling this kind of money - plus the corresponding funds from the other some 7000 QI banks - into IRS-protected and unreportable high-risk and high-return derivatives, can indeed cause the kind of havoc we have seen unfolding on the world market.

The conclusions to be drawn from all this are only in the making; they will eventually be published in a book some time down the road. Nevertheless, some key points have already come to light. They have first been presented at Cambridge, where market-disrupting and anti-business chicken-feed anti-money-laundering frenzies have been compared with the IRS QI system as the world's biggest money-laundering scam ( Where the mutually back-scratching UN, OECD and EU bureaucrats' unmitigated drive against tax competition, fiscal sovereignty and financial privacy have been identified as key factors undermining the enterprising citizens' sense of responsibility and common good reflexes ( And where the emerging theory of organic market failure has attracted attention to the fact that
(a) almost all laws, regulations, and other bureaucratic lawmakings and Ukases are directed at the micro-economic, the grocery level, leaving huge voids - and abusable loopholes and exploitable niches - on the macro-economic and macro-poitical levels which must be filled timely, with competence and a focus on the common good;
(b) conflicts of interests are key social and economic motors which cannot reasonably be suppressed; their carriers should be the less pillorized, and instead encouraged not to run away from them, the higher up they find themselves called upon to exercise responsibilities; and
(c) understanding and responsibly dealing with the inevitability of conflicts of interests particularly at the macro-economic and macro-political levels is crucial if a society is not to falter but to prosper; principled, properly trained, enterprising and visionary strong personalities are called for; they must intuitively be capable and willing to effectively manage and resolve conflicts of interests: not from a micro-economic perspective allowing for the shareholder- and peer-driven exploitation of legal loopholes and niches, but always keeping in mind the need for healthy social gradients, and with a view to promote above all the common good (