This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Bankers Should Be Afraid of Their Own Shadow

For Barclays, a Wednesday $451 million settlement with regulators in the U.S. and U.K. on its alleged manipulation of short-term interest rates bodes even worse.

In reaction to the settlement and the prospect of lawsuits and a government backlash that could cost CEO Diamond his job, Barclays shares tumbled over 12% in Thursday trading, erasing its year-to-date gain.

The trading loss and a prospect of widespread manipulation in self-regulated interest rate markets are separate instances of the same problem: the shadow banking system - a moniker for esoteric swaps, repo and money market-based trading - is the largest, most profitable and least regulated corner of the financial system. As it stands, the world's largest banks that operate in such markets are believed to have the savvy, the controls and the judgment to operate without the need of burdensome regulators.

But comments from the likes of CEO Dimon in assessing JPMorgan's trading loss and a regulatory investigation by the Commodity Futures Trading Commission, the U.S. Department of Justice and the U.K.'s Financial Services Authority, underscore that such confidence is misguided and drastic intervention is needed.

In testimony to a U.S. Senate Committee on Banking, Housing and Urban Affairs, Dimon told lawmakers that the trading loss was a result of a strategy that, "was poorly conceived and vetted." Mirroring issues that caused some Wall Street titans to go belly-up during the crisis, Dimon added that when the unit's trading position soured, the bank's traders, "incorrectly concluded that those losses were the result of anomalous and temporary market movements, and therefore were likely to reverse themselves."

"In hindsight, CIO's traders did not have the requisite understanding of the risks they took," said Dimon, adding that the losses culminated from a strategy that went largely unknown to the firm's management and risk teams. Dimon's comments seem to be a clear acknowledgement that over-the-counter trading, which goes largely unseen to regulators, ordinary investors and even Wall Street's top brass should be brought into the light of day to avoid future blowups.

Allegations of Barclays' manipulation of one of the world's most significant but lesser known financial instruments raises an even greater alarm. Even if banks can be proven to be able to properly monitor their risk taking in shadow markets - or can be proven financially capable to bear the brunt of any losses - revelations of possible widespread collusion in setting Libor and other short-term rates signals that Wall Street cannot be left to police itself.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,039.49 +60.36 0.36%
S&P 500 1,992.37 +5.86 0.30%
NASDAQ 4,532.1040 +5.6220 0.12%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs