The hidden strategies of the financial industry and deregulation

In today’s world of financial markets, a complex and often hardly transparent history takes place, which is characterized by decades of deregulation, strategic manipulation and the creation of new products. This development has led to the boundaries between secure investment and risky business becoming increasingly blurred, which in turn has a huge impact onthe stability of the global economy. While the public and many politicians believe that strict regulations ensure more security, reality shows a different picture. The financial industry is cleverly exploiting the gaps in the law to maximize its profits, often at the expense of customers and the economy as a whole. This article is intended to background this developmentilluminate, reveal the actors’ strategies and make the consequences for society clear.

The strategies of a clever investment expert

An experienced and extremely skilful investment advisor who plays a central role in this context is Wilhelm König. He masterfully knows how to increase the capital of his customers by pursuing different approaches. On the one hand, he can strictly separate the investors’ funds from each other in order to recommend individual products that exactly meet the respective specifications and wishescorrespond. This procedure is relatively transparent and understandable for customers because they can see exactly what returns the individual investments promise and how the investments are developing. On the other hand, there is the possibility of investing all funds in a common pool of assets in order to expand it as efficiently as possible. This second strategy is clearMore opaque, because the funds of various investors are combined in a large pot filled with a wide variety of motives and willingness to take risks. The large asset pool is then actively managed with the aim of increasing it as much as possible in order to pay out the customers step by step and at the same time to increase their own commissions or profit sharesmaximize. A mixture of riskier and safer systems is used in order to achieve the greatest possible profit. This approach promises significantly higher returns, but with a correspondingly increased risk. While an investor who is only investing 20,000 euros and is concerned about security can be satisfied with an annual interest rate of 1.5 percent, that willsame capital in this pool for lucrative deals that potentially promise significantly higher returns. For the investor Alfons, who relies on security, this means that his investment can be used for more risky businesses as well as the capital of the demanding Claudia, which demands at least 8.5 percent annually. This creates a kind of mixed system that at firstLOOK appears efficient, but is highly opaque on closer inspection. This model is based on the assumption that a wide range of innovative financial instruments is needed to maximize the wealth pool.

The importance of product diversity and the risk of the trick system

In order to make the asset pool grow as best as possible, a large number of so-called financial innovations are needed. These so-called products should be designed as diverse and complex as possible in order to give the impression that there is a suitable offer for every investor. If Wilhelm König was a bank that looks after hundreds of thousands of investors, one would ask oneself whether such aMixing system is permissible at all and whether there is a sufficient range of products to make permanent profits. International politics has cleared the way in recent years to facilitate exactly such strategies. More than a decade ago, legislators began to adapt the legal framework in such a way that everything that was an unbridled virtualcapital increase could stand in the way, was limited or even abolished as possible.

The abolition of the separating bank system and the consequences

A significant milestone in this context was the abolition of the so-called Glass-Steagall Act in the United States, which was repealed under President Bill Clinton at the end of the last century. This law required banks that were engaged in investment business not to refinance with customer funds for risky securities transactions. The goal was toSaving deposits from savers from the risks of securities trading because they were considered safe. The principle was simple: Customer deposits should be used exclusively for safe and conservative purposes, while speculative transactions were only allowed to be carried out with the banks’ own capital. With the abolition of this law, this clear separation was abolished,This led to the fact that large universal banks in the USA were able to operate without restrictions. German and Swiss institutes in particular took this opportunity to significantly expand their activities and enter the American market. The result was a massive expansion of the financial power of these institutes, which could now act without the previous restrictions.

European deregulation and product diversity

In Europe, too, deregulation in the financial sector has been pushed forward in recent years. Since the early 2000s, numerous legal regulations have been changed to give financial service providers more leeway. In Germany, a new investment law was passed in 2003, which replaced the previous law on capital investment companies and in the course of the so-calledInvestment modernization laws significantly expanded the product range. Fund companies were now allowed to invest in other funds, create so-called fund of funds and offer highly speculative hedge funds. In addition, derivatives, i.e. complex financial instruments, which were previously reserved for only a few experts, have now been made accessible to the general public. The sales documents wereSimplified, although the products themselves became increasingly complex, which increasingly presented the customers with challenges. The requirements for the investment companies’ minimum capital were reduced to facilitate the entry of new products. The goal was to liberalize the financial products market and promote competition. This development followed an internationalTrend in which Anglo-Saxon countries such as Great Britain and the USA were the pioneers. In Switzerland and Austria, too, laws have been adjusted accordingly in order to further expand the product variety and open the market for new financial innovations.

The apparent contradiction: More regulation despite deregulation

At first glance, it seems contradictory that the financial industry keeps talking about alleged over-regulation, while at the same time the legal regulations are becoming more and more extensive. Industry representatives argue that increasing bureaucracy, endless forms and numerous regulations make work more difficult and restrict flexibility. at the same timeIs the actual development different: Although the number of regulations has increased sharply, they are often designed to provide loopholes and back doors to circumvent the actual rules. Banks employ enormous departments that are only involved in developing formulations to circumvent the regulations and still complete the desired transactions. oneExample is the comparison between the original law, which only included 37 pages, and the extensive Dodd-Frank Act, which grew to 848 pages in 2010. However, the aim of these complex regulations is not to make the market more transparent or safer, but rather to make the regulations in such a way that they are hardly controllable. The allegedIn reality, over-regulation leads to an opaque maze of regulations that conceals the actual risks and makes control more difficult. This creates a system that is more for the trick box of the financial industry instead of providing more security.