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September 30, 2014

Whistleblower: Fed Defers to Big Banks

Summary:

Stunning tapes underscore the risk that remains in our financial system -- and the need for 'interactive finance.'

Photo Courtesy of Eli Christman

“This American Life” teamed up with ProPublica for a blockbuster story that Federal Reserve regulators defer to mega bank Goldman Sachs on compliance issues. Thanks to whistleblower Carmen Segarra, the report about the culture at the Fed was so explosive that Sen. Elizabeth Warren called for an investigation within 24 hours.

The whole mechanics of the story highlight the problems with our current system. But for a whistleblower coming forward, no one would likely learn of the big bank’s conduct or of regulators’ deference to it. Once she provided authentic, unimpeachable audio, a compelling broadcast led a legislator to call for an investigation, but any probe may or may not yield  findings of  wrongdoing. The main result seems likely to be publicity for lawmakers, regulators and bankers. All pretty much par for the course, underscoring the concern I expressed in an earlier piece that a lack of control by the Fed could leave banks and markets in the same sort of condition that led to disaster in 2008.

These issues are consequential for insurers not least because the industry holds $120 billion in mortgage-backed securities for commercial and multifamily real estate,  $336 billion in collateralized debt obligations (CDOs), commercial mortgage-backed securities (CMBSs) and asset-backed securities (ABSs) and $365 billion in residential mortgage-backed securities, according to the Mortgage Bankers Association and Federal Reserve. The insurance industry relies on these investments for significant portions of its operating profits, so it needs a safe and efficient financial system.

A solution is at hand. “Interactive finance” addresses the insurance industry’s transparency needs with large banks by powering real-time monitoring and compliance as it creates efficient markets  and reduces regulatory costs.

Marketcore, a firm I advise, is pioneering interactive finance to generate liquidity by rewarding individuals and institutions for revealing information that details risks.

Interactive finance crowd-sources market participation by rewarding individuals, organizations and institutions seeking loans, lines of credit or mortgages or negotiating contracts with monetary or strategic incentives. These  rewards are  offered in exchange for risk-detailing, confidence-building disclosures that increase trading volumes. Whether risk takers are a bank, insurance company or counter party, all granters define rewards. A reward can constitute a financial advantage — say, a discount on the cost of information or transaction. The sale of the information more than makes up for the discounted fee. The time-sensitive grant of advantage can actually be directed to specific products, benefiting traders.

All this transpires on currently existing electronic displays broadband, multimedia, mobile and interactive information networks and grids. Interactive finance realizes a neutral risk identification and mitigation system with a system architecture that scans and values risks, even down to individual risk elements and their aggregations. As parties and counter parties crowd markets, each revealing specific risk information in return for equally precise and narrowly tailored rewards and incentives, their trading generates fresh data and meta data on risk tolerances in real time and near real time. This data and meta data can then be deployed to provide real-time confidence scoring of risk in dynamic markets. Every element is dynamic, like so many Internet activities and transactions.

Interactive finance constantly authenticates risks with constantly refreshing feedback loops. Risk determination permits insureds, brokers and carriers to update risks through “a transparency index. . . based. . . on the quality and quantity of the risk data records.”

Through these capabilities, Marketcore technologies connect the specific, individual risk vehicle with macro market data to present the current monetary value of the risk instrument, a transparency index documenting all the risk information about it and information on the comparative financial instruments. Anyone participating receives a comprehensive depiction of certainty, risk, disclosures and value.

There will be vastly more efficiency once interactive finance provides timely information that allows for easy monitoring by regulators and lawmakers, provides incentives for compliance by big banks and stimulates efficient markets.

There will be no more need for whistleblowers if interactive finance provides timely information that allows for easy monitoring by regulators and lawmakers that forces compliance by big banks and markets.

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About the Author

Hugh Carter Donahue is expert in market administration, communications and energy applications and policies, editorial advocacy and public policy and opinion. Donahue consults with regional, national and international firms.

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