Financial Reform Has No Credit Default Swap

This worked to the industry's advantage. Anyone who thought they knew what they were buying was gravely mistaken. The SEC and ratings agencies were either duped or complicit or both in propagating the myths adding to Wall Street's ability to hype huge deals. This was three-card Monte of the highest magnitude.

This is what happens when you allow folks in Washington DC, and on Wall Street, who think that they are geniuses (but actually have no common sense), to play with derivatives.

What has been described by "my pal Warren" as "weapons of mass destruction" came very close to destroying the entire global economy. We may finally be seeing a little light at the end of the tunnel now; unfortunately it is a very long tunnel.

Powerful companies like Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, Merrill Lynch, Countrywide Savings and many more did not survive these WMD's long enough to see the light. They were swallowed up by Bank of America (BAC), JP Morgan Chase (JPM) and Wells Fargo (WFC) that are just now seeing the light. Some companies did not see any light but the government held their hand and is walking them though the tunnel until their eyes can adjust. We still have American International Group (AIG), Citigoup (C) and General Motors (though the last is not a public company for now), showing some recent promise.

I have been told many times that there are two things you do not want to see made. You do not want to see how they make sausages and you do not want to see how Congress makes laws. We have recently witnessed the creation of a massive health care bill but we are only looking in from the outside. The true effects will not be known for a while. Some aspects will be sorted out by litigation.

Now Congress is putting the final touches on financial reform legislation. There is plenty of debate and even more lobbying as Wall Street players do not want to change much, even after a near fatal breakdown of the system. If there ever was a case of the fox being allowed to guard the hen house, this may be the best example.

No matter what ends up in the "new rules" regarding what financial institutions can and cannot do some things are very basic -- disclosure and transparency must be complete and unabated. No more black box deals. In addition, the leading economic powers must get together to crack down on offshore financial hideouts where many highly questionable business activities take place.

There are some foreign lands where the entire place is one giant black box. This means you, Switzerland. Why does neutral have to mean secretive? This means you, Bahamas. Stick to tourism and expose; the buried treasure that white collar pirates have been stashing there for decades.

The second point is that there must be separation of in-house proprietary trading and client trading. Pretending that they can be separated in the same organization is a faulty premise and a gargantuan conflict. If it means divesting businesses, than do it. This has been recommended by Paul Volcker, perhaps one of the few with clean hands that knows what he is talking about, and supported by many other financial luminaries like Jeremy Grantham of GMO, a highly successful Boston based hedge fund.

From all I have heard during the past year, I think that warp speed electronically programed trading should be stopped. It has increased volatility, front running, computer scams, and either by design or foolishness has not lead to greater accountability.

If you have an opinion about these matters you can't write your "representatives" fast enough.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares and options of BAC, C and WFC.