Montreal, Canada

The biggest long-term threats to the viability of the financial system remain a clear and present danger in late 2009. Nothing has been done to fix this imminent threat or to isolate toxic assets that triggered the first wave of the 2007-2009 credit crisis.

Three areas of financial reform remain unaddressed and continue to plague the financial system like a bad dream. These include toxic assets, credit default swaps and separating banking from investment banking or basically reintroducing the 1933 Glass-Steagall Act, which was repealed by the Clinton administration in 1999.

It's inevitable that over the next five to ten years we'll suffer another meteor-like smash of the financial system; only governments won't be able to calm down global markets next time. The threat of another Great Depression is quite probable and investors should prepare for another Day of Reckoning.

The market was abuzz last February when Treasury Secretary, Tim Geithner, announced plans to create a fund or pool to isolate toxic assets clogging bank balance sheets. Despite a strong initial response for the plan (Public-Private Investment Program or PPIP) the idea has been delayed or shelved amid a spectacular rally in credit spreads since March. Nothing has changed. Nothing has been fixed. The massive post-March rally has blinded Washington, Wall Street and investors into thinking that we don't need to fix bad assets.

Credit default swaps, which threaten to obliterate the entire financial system, should be eradicated entirely. This is the advice from George Soros – probably the greatest trader in the world over the last fifty years.

Credit default swaps represent more than $30 trillion dollars' worth of notional contracts that have yet to fully settle between two or more counter-parties. Despite a plan to create a trading platform earlier this year among the largest exchanges (CME, ICE), nothing has been introduced. These floating time-bombs remain a big threat to the system. With Wall Street or what's left of it still generating bucket-loads of fees from derivatives, it looks like bankers have successfully bribed or pandered Washington to leave this area of the market alone – at least until the next crisis arises.

And finally there's the biggest blunder in financial sector reform that occurred under Clinton. Probably no other president did more to damage financial privacy and bank stability.

In 1999, the Clinton administration repealed the Glass-Steagall Act, which separated traditional banking (deposits, loans etc) from high risk investment banking. Introduced in 1933 as the United States was in the depths of a financial washout, Glass-Steagall should have never been repealed; over the last ten years we now know that investment banks turned themselves into high-flying leveraged casinos helped by former Fed Chairman Greenspan's near-zero percent money starting in 2003. By the way, Bernanke, the current Fed Chairman, has rates at almost zero percent now. I'm not sure but it seems we're encouraging the same kind of craziness that got us in this deep hole in the first place all over again.

Investors might be tempted to embrace risk at these dizzying levels as we conclude another fantastic quarter for risky assets today. But I prefer to remain hedged. The Piper will come calling again one day because the same problems that got us into this mess have not gone away.