Although financial indices have slumped recently because of the tsunami in Japan and a trade downturn, the S&P 500 has trended massively upward, and corporations have seen record earnings since the start of the recession.

The announcement is good news for investors, as Bloomberg reports that the cuts to shareholder dividends that many corporations enacted as the economy entered free-fall have resulted in massive cash reserves. Investors will start to see some of that money in the coming year, Bloomberg projects, with 378 of the 380 S&P companies that pay dividends to shareholders forecasted to restore dividend payouts to pre-recession levels. American corporations now have a record stockpile of $937 billion in cash reserves.

Bloomberg does report at least one aspect of the corporate financial boom that could have positive repercussions for those who don’t have extensive investments. Oil prices are projected to return to $99 a barrel in New York in coming months, a benchmark that was passed as a result of Mideast unrest — though, even after adjusting for inflation, $99 is still a level that had not been seen in American history until recent months.

Congress is taking the issue up this week as well. Tomorrow, the same executives who met with the SEC today will appear at a hearing of the House Financial Services Capital Markets Subcommittee, called by Rep. Paul Kanjorski (D-Pa.). And last week, Sens. Ted Kaufman (D-Del.) and Mark Warner (D-Va.) asked the SEC and the Commodity Futures Trading Commission to investigate the market event in Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill.

At issue is whether brokers should be required to put their clients’ interest first — what is known as fiduciary duty. The professionals known as investment advisers already hold to that standard. But brokers at firms like Merrill Lynch and Morgan Stanley Smith Barney, or those who sell variable annuities, are often held to a lesser standard, one that requires them only to steer their clients to investments that are considered “suitable.” Those investments may be lucrative for the broker at the clients’ expense.

Their lobbyists are spending money to kill a requirement that brokers steer their own clients to transactions in the best interests of the clients rather than the broker — because, apparently, that’s not what they are actually doing. It’s like those cartoon Charles Schwab commercials were telling you the truth!

The financial reform bill promoted by Sen. Chris Dodd (D-Conn.) would eliminate a decades-old exemption that allows brokers to claim that they aren’t financial advisers — and thus required to provide advice in the clients’ best interests — as long as they aren’t getting paid for the advice. So, if your broker gives you advice of what to buy, but he’s only paid for the act of buying it, your interests never have to come first. Brokers, naturally, prefer the House legislation which allows them to continue to sell you bad investments as long as they tell you first that you ought to make better ones.

Insurance companies, by the way, want to be left out of that regulation all together, because they’re not even interested in steering their clients to “suitable” insurance products. As far as they’re concerned, “Buyer Beware” is a good enough standard.

“Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding,” he wrote.

Markets reacted as though the news that interest rates won’t stay at nearly zero forever was shocking — and as though “at some point” might come tomorrow. The Dow dropped 40 points in the 90 minutes after Bernanke’s 10-page statement was released. The best explanation of why everyone freaked out came from someone who himself swore he wasn’t freaking out.

“Saying it will raise rates ‘before long,’ obviously there’s no specifics but it does put potential rate increases back on investors’ minds,” said Alan Lancz, president of Alan B. Lancz & Associates. “Before, it was considered not in the foreseeable future.”

In other words, the people to whom Americans with 401k’s, Roth IRAs and other retirement accounts are entrusting their non-foreseeable futures were unable to conceive of a point in the near term at which the Fed would return interest rates to something approaching historical norms, and have been investing your money as though the crisis would last forever.

No wonder Chase CEO Jamie Dimon expects a financial crisis every five to seven years.

The three books are “Too Good to Be True: The Rise and Fall of Bernie Madoff” by Erin Arvedlund, “Betrayal: The Life and Lies of Bernie Madoff” by Andrew Kirtzman, and “Madoff With the Money,” by Jerry Openheimer.

Among the highlights, according to reviewer Carlos Lozada:

Madoff’s heartlessness was breathtaking.

On the day of Madoff’s sentencing, Judge Denny Chin described a letter he received from a widow who went to see Madoff after her husband died of a heart attack. Bernie put his arms around her and said, “Don’t worry, your money is safe with me.” She lost everything and had to sell her home. It was such personal betrayals, as much as the financial losses, that transformed Madoff into one of the most vilified men in America.

The warnings from Madoff competitor Harry Markopolos to the feds regarding his scheme were detailed, complete, and totally on the mark.

Markopolos’ November 2005 memo to the SEC, a 21-page document titled “The World’s Largest Hedge Fund is a Fraud,” belongs in the Unheeded Warnings Hall of Fame, the financial world’s answer to “Bin Laden Determined to Strike in U.S.”

In the end, Madoff’s swindle wasn’t all that hard to figure out. It was just an ordinary, run of the mill Ponzi scheme:

Maybe there is just not much to say about Bernie Madoff, no great depths to plumb. He may simply be a heartless man of middling intellect who felt no compunction in defrauding strangers and loved ones. His scam was not some devious piece of financial engineering and technical know-how; for years, he simply deposited investors’ cash in a bank account, taking vast amounts for himself and hoping to pull enough in to keep the scheme going. Madoff does not embody the perils of a turbulent marketplace; in fact, the market did him in.

As Lozada points out, it’s too early to comprehend Madoff’s legacy just yet, but undoubtedly as more details leak out regarding his operation, we’ll know and understand more. In the meantime, the books about him so far don’t add up to a portrait of an evil genius. As Lozada puts it, Madoff certainly may have been evil. But a genius he was not. Which makes his swindle all the more fascinating, for those of us still trying to figure out how so many rich and powerful people got totally taken in by it.

–

You can follow TWI on Twitter and Facebook.

People are “rightly outraged” about the AIG bonuses that were paid to executives notwithstanding the firm’s huge losses, Obama said, but “just as outrageous is the culture these are a symptom of.” He cited a culture that rewards “excess greed and risk-taking.”

As we get out of this crisis, as we work towards getting ourselves out of recession, I hope that Wall Street and the marketplace don’t think we can return to business as usual. The business models that created a lot of paper wealth but not real wealth in this country can’t be the model for economic reform. We have to move beyond a constant bubble-bust mentality.  We have to be thinking about economic growth … increasing our productivity across sectors. Shareholders and boards of directors have to hold executives more accountable for their compensation scales. The fact that these guys are looking for bonuses after having run down AIG raises the question of why were they making this kind of money beforehand? This kind of culture has to change.

Obama said he’ll be working with his economic team — including Treasury Secretary Timothy Geithner, who he expressed full confidence in — to develop “smart regulations” so the government never has to step in again.

Although he assumed responsibility for having to clean up the situation now, Obama took a not-so-subtle swipe at Republicans who’ve long resisted any regulation of executive pay.

A whole bunch of folks now are feigning outrage about these bonuses, but a year or two ago they said we should never meddle in these compensation plans. That it’s part of the market. Now suddenly they’re outraged. …

My hope is that one of the lessons we learn here is that putting smart regulations in place is important. These things are not anti-market, they’re pro-market.

As Calculated Risk puts it, it’s time to party like it’s 1997.

Indeed, the Wall Street Journal runs the numbers:

The Dow Jones Industrial Average, which suffered a 485-point slide last week to hit new bear-market lows, ended down 250.89 points, or 3.4%, at 7114.48, its lowest closing mark since May 7, 1997. The S&P 500 dropped 26.72 points, or 3.5%, to 743.33, its lowest close since April 11, 1997.

The economy was booming in those Clinton years. But it’s painful to see the stock market falling back to  mid-1990s levels.

When it comes to the stock market, forget about nostalgia. Just cross your fingers and hope for an end to the free fall.

Ordinary taxpayers would like an answer to this question: Why have they been billed more than $45 billion to rescue Citigroup from failure when, as president of the Federal Reserve Bank of New York, you were its primary supervisor? Three major problems led to Citigroup’s downfall: bad investment policy; overexpansion, which overwhelmed Citigroup’s management; and an inadequate capital base. Why was Citigroup’s supervision inadequate to deal with these problems?

Here’s another:

How do we more effectively regulate the financial services industry without adding unnecessary regulations that cripple our ability to compete globally?

I’d like Geithner to lay out honestly, and in clear terms, exactly how bad the mess we’re in has gotten – and how scared we should be. Judging by Wall Street’s reaction on Tuesday to mounting bank troubles, this is a crisis that’s getting worse by the day. To earn the trust of Americans, Geithner needs to go on the record here, and begin offering the kind of transparency that has previously been missing.

Financial shares alone fell to a 14-year low, Bloomberg added:

State Street Corp., the largest money manager for institutions, tumbled 59 percent after unrealized bond losses almost doubled. Wells Fargo & Co. and Bank of America Corp. slumped more than 23 percent on an analyst’s prediction that they’ll need to take steps to shore up their balance sheets. The Dow Jones Industrial Average plunged 4 percent, the most on an Inauguration Day in the measure’s 112-year history.

As if that’s not bad enough, there’s more. Also from Bloomberg:

U.S. financial losses from the credit crisis may reach $3.6 trillion, according to New York University Professor Nouriel Roubini, who predicted last year’s economic and stock-market meltdowns. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion,” Roubini said at a conference in Dubai today. “This is a systemic banking crisis.”

Well.

Calculated Risk puts the problems in perspective:

From an economic perspective, Mr. Obama’s first few weeks in office will be critical as his administration finalizes the stimulus package and addresses the ongoing crisis in the banking system. Best wishes to Mr. Obama. You are now on the clock.

I guess today’s slide is just Wall Street’s way of welcoming the new administration.