Barron’s Review Column asks various people “Is the plan to curtail banking activities and rein in risk-taking a good idea?”

Here are a few of their answers:

“These new ideas are all good stuff…and entirely justified. Everyone…knows banks trading their own capital like a hedge fund is a conflict of interest….[It] was indeed the rot at the heart of our financial problems.”
-Jeremy Grantham
Co-founder, Chief Investment Strategist, GMO, in a recent client letter

“Trading did not lead to the financial crisis. While we await details of the plan, our initial observation is that rather than arbitrarily banning certain activities, or setting arbitrary size limits, [we] should focus on improving risk management, internal controls, corporate governance and supervisory oversight, and creating the authority to wind down large financial institutions.”
-Rob Nichols
President, COO, Financial Services Forum

“Nearly a year ago, we investors recommended enhanced bank regulation to avoid a repeat of the financial crisis, that OTC derivatives markets be eliminated, and that proprietary trading [not] be permitted to jeopardize banking operations. Industry’s reaction to the Volcker rule makes it look like it has amnesia.”
-Kurt Schacht
Managing director, CFA Institute Centre for Financial Market Integrity

Interesting perspectives . . . My own view is nuanced:

-Risk-taking is fine; excessive risk taking is a problem. And ANY Risk-taking without the ability to pay off your bad sepculative bets is totally unacceptable. That is a form of “Heads I win, tails you lose” that is a recipe for taxpayer financed disasters;

-Prop trading did not cause the crisis, but it presents a future risk. If Banks want access to cheap Fed money, taxpayer backed guarantees, and FDIC insurance, than no prop trading.

You get to choose what type of financial institution you want to be: Hedge fund? Insured Commercial Bank? Leveraged Investment House? Sure! However, if you choose the FDIC/taxpayer backing, you have to forgo the other two choices.

>

Source:
They Said What? The Volcker Rule
ROBIN GOLDWYN BLUMENTHAL
Barron’s FEBRUARY 1, 2010
http://online.barrons.com/article/SB126481011371437491.html

Category: Bailouts, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “Volcker Rule Chatter”

  1. Winston Munn says:

    “if you choose the FDIC/taxpayer backing, you have to forgo the other two choices.”

    Uh, seems to me we already had a similar rule in place – and all that happened is that when the investment banks got into trouble they held out their hands and said, I changed my mind, I wanna be a commercial bank, now, and the Fed said, Sure, no problem. Here’s your billions.

  2. DM RTA says:

    Why is that everyone in this public argument skips over the most important issue and goes for the ugly detail first:

    Step #1: Limit Leverage

    Argue about any definitions, ways to describe it, or any other specifics you like after that but, first, limit leverage

  3. David Merkel says:

    Barry, there is a simple solution for this: modify the banks’ risk-based capital formula such that any sort of risk that is equivalent to investing in equities, or worse, would be done as a straight deduction from equity, or, have to be in a separate subsidiary (w/no cross-guarantees).

    Why do you think most of the life insurance industry has little equity exposure, aside from variable products whose performance (or not) passes straight through to customers? The RBC formulas prevent most investing in them. Why do you suppose almost no insurers failed in this crisis? (AIG failed because of a non-insurance subsidiary.) The RBC formula for insurers is much tougher than that for the banks. The insurers were less levered, and had fewer risky assets as a result.

  4. rktbrkr says:

    -Risk-taking is fine; excessive risk taking is a problem.

    The TBTF banks will argue their new risk models will prevent “excessive” risk and maybe they put up a Chinese wall between their regulated and non-regulate activities. And then when something “unimaginable” happens like falling real estate prices or hyperinflation then they’ll be back for more taxpayer succor.

    The recent extreme actions taken by the Fed make some sort of unimaginable scenario more likely rather than less likely. “we never imagined this level of government deficits would drive interest rates so high”!

  5. Pete from CA says:

    “rather than arbitrarily banning certain activities, or setting arbitrary size limits, [we] should focus on improving risk management”

    Is Rob Nichols trying to be funny? As long as the banksters’ ultimate risk management tool is to fall back on my tax dollars, I demand the right to ban certain activities and set size limits as part of MY risk management.

  6. mathman says:

    - just something to listen to while reading and replying, enjoy your weekend (it’s 18 here):

    http://www.youtube.com/watch?v=pFbjE7NFmUI

  7. “…Everyone…knows banks trading their own capital like a hedge fund is a conflict of interest….[It] was indeed the rot at the heart of our financial problems.”
    -Jeremy Grantham
    Co-founder, Chief Investment Strategist, GMO, in a recent client letter

    much like..”…Risk-taking is fine; excessive risk taking is a problem. And ANY Risk-taking without the ability to pay off your bad sepculative bets is totally unacceptable. That is a form of “Heads I win, tails you lose” that is a recipe for taxpayer financed disasters;..”–from BR, above.

    is all, too, True.

    and, as Grantham points out..”Everyone…knows..….[It] was indeed the rot at the heart of our financial problems.”

    whether they say as much, is a different story..

    the whole “Lender of Last Resort”-canard should re-thought/excised, instead of being exercised..

  8. DM RTA,

    to your Q:

    b/c they know what their minders know/tell them..

    see..”…Archimedes was talking about leverage, one of his favorite topics. He said, “Give me a place to stand on, and I will move the Earth.” The Sicilian from Syracuse probably knew more about mechanical leverage than anyone of his era, which was the third century BC, but he didn’t know about financial leverage. Some people are still finding out about financial leverage, particularly on Wall Street, and doing it the hard way…”
    http://www.tech-news.com/another/ap200708.html

    and, as rktbrkr points out, IOW, these guy : ““Trading did not lead to the financial crisis. While we await details of the plan, our initial observation is that rather than arbitrarily banning certain activities, or setting arbitrary size limits, [we] should focus on improving risk management, internal controls, corporate governance and supervisory oversight, and creating the authority to wind down large financial institutions.”
    -Rob Nichols
    President, COO, Financial Services Forum

    is part of that problem. Good thing he has two Titles, b/c imagining that he has two Brain Cells, might be a reach..

  9. bsneath says:

    From what I gather, derivatives markets are turning otherwise insignificant events into TBTF episodes. The latest example may be Greek sovereign debt.

    How can derivatives be good for financial stability when they permit financial players to wage bets in amounts that far exceed the actual value of assets that are at risk?

  10. d4winds says:

    re: “You get to choose what type of financial institution you want to be: Hedge fund? Insured Commercial Bank? Leveraged Investment House? Sure! However, if you choose the FDIC/taxpayer backing, you have to forgo the other two choices.”

    Amen.

  11. Machiavelli999 says:

    Paul Krugman has a nice post today about Canada. Who avoided this entire financial debacle completely. How did they do it?

    Well, as he says: regulation, regulation, regulation. And NOT because their central bank raised interest rates sooner.

    http://krugman.blogs.nytimes.com/2010/01/30/worthwhile-canadian-example/

  12. DM RTA says:

    Thanks for the link Mark.

    So long as we know persistent deflation is a credible threat :
    http://www.nytimes.com/2010/01/30/business/global/30deflation.html?th&emc=th

    and that throwing money at it may not work (or at least have significant unintended consequences), then the thought of leverage working against our (national) position should scare the hell out of us and force smart regulation that fits the days we are living through….

    That’s my thought anyway.

  13. wunsacon says:

    Barry, there’s a strong disbelief among some libertarians and the GOP that changes (sponsored in the name of deregulation*) to financial regulation (since 1980 on) in any way contributed to the S&L crisis or GD2. Sometimes, they set up a strawman (i.e, “no, it wasn’t *the* cause of the problems” — yes, I agree it wasn’t “the” sole cause). I suspect their ideology influences their cognition.

    * Yes, there was still a lot of regulation left on the books. But, next time someone says “let’s deregulate”, think about whether the remaining regulations define an unstable system. Have to look at the whole system before and after changes.

  14. wunsacon says:

    Machiavelli999, did Canada avoid the problem or were they just “behind” us enough so that the US’s bailout of the global financial system helped them in time?

    I do recall Mish pointing out significant problems in Canada (and in Australia). Maybe those debt bombs are still ticking — not defused (or nonexistent — as PK implies).

    (I don’t know. Just mentioning some alternative possibilities.)

  15. mad Albanian says:

    krugman got it all wong on this one. If anything Canadian Banks are in worse shape than the American one. They are leveraged double what their cousins in the souh are and all their bad mogages got quietly bought by the goverment of Canada through CHMC

    The goverment of Canada has become now the biggest subprime lender in the world through CHMC. On the past two years, canadian banks increased their morgage portofolio by just 0.01 %. All morgages were sold to CHMC.(goverment of Canada) Have a look here if you want to know the sate of affairs in Canada, it is all detailed.

    Canadains are more in debt now than the americans [BR: Thats incorrect]
    and the price of a house in Canada is way more than at the peak of the bubble in the states. Canada is a big accident waiting to happen. It is amazing how people have become lazy nowdays, they just tend to repeat what goverment officials say without looking behind the numbers. Yes, the 5 canadian big bank did not go under, but that is all courtesy of the Canadain taxpayer who took all their bad debt under the goverment owned CHMC which insures (more than 1 trillion CAD) now all the morgage market in Canada.

    Canadian standards were not better than in US, we had 0 down 40 years loans, now we have 5 down 35 years but most banks will go around that rule or any rule and give you more money as long as you qualify for CHMC insurance. They dont care about the risk, all it matters is that you qualify for CHMC insurance. We still have banks giving no income verification loan tody and advertsing it.

    https://www.cibc.com/ca/mortgages/self-employ-rec-mortg.html [BR: this requires 35% down; if you cannot make that down payment, you must pay a penalty interest rate AND have mortgage insurance] Krugman’s take and most media’s report on Canadian banks is really not researched. We are no better than US and if anything ,we are going to fall much harder.

    ~~~~

    BR: Three questions to determine of you, mad Albanian, are as crazy sas your name suggests:

    1. How many Canadian banks went belly up, insolvent, or collapsed over the past 2 years?

    2. How much has the Canadian taxpayer spent bailout out their banks?

    3. What is the Canadien foreclosure rate

    4. How is their currency doing?

    I am going to have throw the yellow penalty flag. While I have no clue what ,ight happen to Canada’s banks in the future, Canadian Banks are are hardly in worse shape than the American one…

  16. Clay says:

    Links to OCC reports on cash and derivative trading compiled from information provided by 1,065 US commercial banks:
    Q309: http://www.occ.treas.gov/ftp/release/2009-161a.pdf
    Q407: http://www.occ.treas.gov/ftp/release/2008-36a.pdf

    At 9-30-09 bank derivatives held totaled about $204.3 trillion (up $804 billion from Q209). Analysis of derivatives contracts held revealed that about 84% were Interest Rate, 8% Foreign Exchange, 1% Equity, 6% Credit derivatives (98% CDS’s), and less than 1% in Commodity/Other.

    During Q309 trading in foreign exchange was the only category with a loss of $1.535 billion. However the worst Qtr during the past 8 Qtrs on page 2 reveals that $11.78 billion was lost on Credit derivatives contracts. Not surprisingly, these losses occurred in Q407: Total Credit derivative trading losses for 2007 amounted to $12.673 billion (see page 2), which I presume were due to credit default swaps.

    Based on this info, it would appear that the greatest trade risk occurred with the credit contracts and more specifically the CDS’s, especially during the credit cycle crisis. I presume the banks have been trading Interest Rate Swaps for years and probably have done well in controlling risk/losses with them as well as foreign exchange and equities. Commodities/Other trading appeared to be insignificant.

    I am not advocating high risk/highly leveraged trades, just making some observations.

  17. wunsacon says:

    >> “Trading did not lead to the financial crisis. While we await details of the plan, our initial observation is that rather than arbitrarily banning certain activities, or setting arbitrary size limits, [we] should focus on improving risk management, internal controls, corporate governance and supervisory oversight, and creating the authority to wind down large financial institutions.”

    Hahaha… Will there ever be steps to “improving risk management, internal controls, corporate governance and supervisory oversight” that this shmo won’t label “arbitrary”??

    A: “Let’s require 20 % down.”
    B: “No! Why x % ? That’s arbitrary!”

  18. cognos says:

    The PROBLEM with the thoughts expressed here (for the most part) is that we did not have SOME banks with problems due to mgmt, regulation, controls, TBTF, or certain business practices. We had ALL banks in deep trouble because of a massive systematic problem with real-estate.

    Let me express this very simply — banks, insurance companies, and people — WOULD ALL NEED A BAILOUT if there was thermo-nuclear war. Thus, more generally, a large crisis always has potential bailout ramifications. The bursting of a real-estate bubble, while not quite armageddon, rises to this level. It is no surprise it needs a bailout. And actually, the fact that some similar events including managed wind-downs and bailouts MIGHT occur 25, 50, or 100 years from now. Its not really that concerning, is it?

    To avoid this very simple issue with delusional fantasy-level understandings of TBTF (not the core prob) or regulating prop trading (not really even close to the prob) is just silliness run amuk by lazy pundits (modern Ben Stein’s) and ignorant politicians.

    IF one were to want to improve the regulatory structure for the benefit of citizens and industry (noble, positive goals)… one should focus on housing and real-estate and simplifying OTC derivative exposures (already done!). But the main thrust should be on foreclosure avoidance (works for no one) through better consumer protections, and COUNTER-CYCLICAL regulation of the downpayment protection. Low-downpayment or low-equity is THE primary driver of levered bubble. Not the interest rate. And not complex activity specific “cans” and “cannot” in terms of banking functions or regulators.

    Think about it… if ALL mortgages were 30% down at 3% interest… would we have ever had a housing bubble? Even if we did, would we have had any losses across banks?

  19. cognos says:

    To put some perspective around it:

    the US govt spends $200B per month or $2.5T per year. We spend, through the govt $25T per decade (more going forward). Tax payer losses associated with the entire financial crisis will be <200B, maybe <50B. At the high-end this is <1% of the decade's govt spending. It is about 2-4x estimated yearly medicare fraud costs.

    Why dont we start talking about medicare fraud costs? Or stopping frivolous and poorly executed wars? These costs seem roughly 100x order of magnitude to the American people?

    Also, when Goldman pays $20B in compensation… dont those people pay $10B in taxes? If they do… it seems the financial sector must pay about $500-750B in annual taxes. As long as that is true… I want them to go make MUCH MORE MONEY. Dont forget, financial services are probably the US #2 export (I would guess that technology is #1).

  20. royrogers says:

    like a little immature children, if you keep on helping them out when in trouble, they will never grow up. Don’t help them with Tax money next time they get into crap.
    They can do what ever they feel like with their own money or fools that invest with them.

  21. scharfy says:

    It is at the heart of the current American way that depositors, once they leave their money at “the bank”, are safe. That is, the risk assessment that occurs in every other aspect of our lives (i.e. , lending money to your friends, investing in stocks, buying a car) seems to not even occur when dealing with the bank.

    Clearly, the GOVT isn’t truly capable of watchdogging every bet these guys make with our money, nor should they be. We have been lulled to sleep by decades of rising asset prices courtesy of cheap credit. We are still asleep because our losses will be spread across the next 20 years.

    Prop trading is but a pimple on the ass of this problem. There are structural problems in the mechanism by which we dole out our sacred dollars to the money changers.

    The banks lost money the old fashioned way, bad loans. Until the customers hold banks to the same standard they hold other parts of their lives, I would expect the banks the always be one step ahead of the regulators with regard to taking excessive risk. And unless we actually take one on the chin, and take an actual hit on a deposit, we will never extract the necessary pound of flesh from the banks, and cause real change.

    The banks were, and still are, a protected / subsidized part of our lives – and operate outside the bounds of normal risk/reward paradigms. And after the bailouts, more so than ever.

  22. Howard says:

    Interesting charts -
    http://www.usgovernmentspending.com/us_20th_century_chart.html

    I was thinking about your “Veneer of Volckerism” post, and commented about the interweave of banking and government in the US started in earnest 30 years ago a response to growing economic power of the Zaibatsu, with a change of the players (China replacing Japan) only reinforcing the strategy. The US banking system has in essence been nationalized, though the planners have screwed up somewhat in being unable to manage the PR problems created by offensive executive compensation levels.

    Money is a very abstract concept when the currency isn’t tied to something tangible (i.e. gold or oil). Government can print as much as it wants within a closed system and define more-or-less how it converts, since government spending represents approx 50% of GDP. Conversion value of money only becomes important when you want to exchange it outside the closed system (import/export), but everyone else’s economic system operates on more or less the same basis as ours, so that issue seems manageable.

    From a bigger picture perspective, what does this all mean ? Do budget deficits actually matter, given that the Fed somehow gained the authority to purchase arbitrary amounts of Treasury issues, mortgage debt, etc ? Interest rates have to stay low to keep a lid on Treasury debt service and to support a national mandate of home ownership (even if things got a bit out of whack over the past few years).

    Anyhow, food for thought …

    Regards,

    Howard

  23. wally says:

    “Trading did not lead to the financial crisis.”
    The trouble with this comment by Nichols, is that nobody said it did. Trading BY CERTAIN INSTITUTIONS did.

  24. cognos says:

    No Wally — Real estate bubble and bust did. Nothing else. The major losses are all just real-estate foreclosure caused. No “trading by CERTAIN INSTITUTIONS” caused anything, >100 small classic old-style banks failed. The big failures were all concentrated in real-estate (i.e. mortgage) focused institutions (Bear, Lehman, Fannie, Freddie, WaMu, Wachovia) with a few other casualities.

    And frankly, its over… bc we no longer have a real-estate bubble.

  25. wunsacon says:

    Cognos,

    >> Low-downpayment or low-equity is THE primary driver of levered bubble. Not the interest rate. And not complex activity specific “cans” and “cannot” in terms of banking functions or regulators.
    >> Think about it… if ALL mortgages were 30% down at 3% interest… would we have ever had a housing bubble? Even if we did, would we have had any losses across banks?

    These are good questions.

    One could also ask whether we would have had a housing bubble if:
    - Appraisal fraud had been investigated in 2001.
    - Interest rates had been raised earlier and faster from 2004, amidst obviously unsustainable trends.
    - The FBI, which identified mortgage fraud and an opportunity for an epic housing bubble back in 2004, been staffed to go after something in addition to homeland security and voter irregularities.
    - Other federal oversight not been hamstrung and splintered in a manner leading to jurisdiction shopping over many years.
    - There been no Fannie/Freddie.
    - Firms with opaque balance sheets — who use their opaqueness to obtain lower interest rates from “InvestTools” (TM – Mannwich) — not been allowed to obfuscate their holdings.
    - More, I’m sure…

    And if we had kept different kinds of operations separate from each other, we could have allowed more firms to simply fail (as royrodgers suggests) without worrying about (whether valid or not) the effects on lenders or Main Street.

    As for the fact many banks nominally speculated on ever-increasing nominal RE values: Yes but they *originated* loans with the purpose of selling them to wholesalers who repeatedly bought and misrated their loans. The CEO’s, boards, executives, and top sales people took home a lot of commission/salary/bonuses for their role. But, without the secondary market helping generate those big commissions, they would not have made those bets.

  26. wunsacon says:

    Cognos,

    Nevertheless, I like the idea of requiring 30% down as part of the solution. It’s *one* way to place a firewall between potential meltdowns and potential looting of public coffers.

    The meta problem is: not enough equity in the system, either by banks or by borrowers, so that a run on the financial system leads to “mama, bail me out!” Raising reserve requirements / lowering leverage — either by the borrow, by the lender or both — reduces the likelihood of bank runs.

  27. wunsacon says:

    I think the problem of finding the cause(s) of the financial meltdown are a Rorschach test. Most people see what they want to see. So, when Grantham says “in the long run, we will have learned nothing”, he’s right about the outcome but wrong in his timing!

  28. bsneath says:

    wunsacon Says:
    January 30th, 2010 at 12:27 pm

    Barry, there’s a strong disbelief among some libertarians and the GOP that changes (sponsored in the name of deregulation*) to financial regulation (since 1980 on) in any way contributed to the S&L crisis or GD2.

    wunsacon – Oftentimes those who subscribe hard and fast to a certain dogma will not allow facts and subsequent events to persuade them differently. It is the same as a Marxist who does not see central economic planning and state ownership as causing the decline of the USSR.

    Even Alan Greenspan accepts that laissez-faire policies contributed to the financial meltdown.

    What is important is the opinion of the moderate classes who usually determine elections and public policy.

  29. bsneath says:

    cognos Says:
    January 30th, 2010 at 3:11 pm

    “No Wally — Real estate bubble and bust did. Nothing else…”

    This is a true statement but it is also only a partially true statement. One must ask , How did the real estate bubble reach such monumental proportions?

    I would offer the answers to that question lie in the actions of the money center banks, such as 1) the risky financial products they created, 2) the deregulatory/political environment that allow them to leverage to astronomical levels (both on and off balance sheet), 3) the “greed is good” rationalization that infected Wall Street and other money centers to a point of absurdity, 4) the compartmentalization of activities that permitted every party to shift risk to the next party and finally 5) a “lets game the system for personal benefit” attitude that has infected our society.

    If a couple of these sound naive or sophomoric, so be it, but in the long run, an economic or civil system is not viable without reasonable parameters of trust and integrity. These values are sorely missing today and we are not moving in the right direction when we see our elected officials resort to back room bribery, corporate acquiescence and zero transparency in the process making law.

  30. Groty says:

    Lending money is always inherently risky. Volcker effectively bankrupted Citibank in the 1980s after he jacked up interest rates to absurdly high levels. And it wasn’t investment banking or prop trading that killed Citi then, it was good old fashioned commercial banking.

    And the irony is most of Cit’s problems came from what is perceived to be the least risky kind of lending: sovereign debt. Several Latin American countries defaulted after Volcker’s high interest rate policies left them unable to service the debt and ultimately led to one of the worst recessions since the 1930s. Those defaults left Citi and most of the big money center banks effectively insolvent. So, Citi’s loan book was loaded with the least risky assets, capital could only be levered 10:1, and Volcker still managed to kill it.

    A company whose sales depend on a single product is generally considered more risky than a company with multiple products. Why does that principle not apply to banking? Why is it not the case that allowing banks to engage in activity not directly correlated with traditional lending will diversify their revenue stream and possibly make them less risky?

  31. wunsacon says:

    >> A company whose sales depend on a single product is generally considered more risky than a company with multiple products. Why does that principle not apply to banking?

    Banks created multiple products in an alleged effort to manage risks. But, factually, we can say now that they only increased their risks. That doesn’t answer your literal question “why?”. But, it does suggest that there probably is an explanation for what you (perhaps) intended only as a rhetorical question.

    Here’s a possible answer: Lending is basically a single product. Creating multiple “instruments” to lend or increase lending beyond the baseline isn’t “diversifying your product portfolio”. It’s simply obfuscation.

  32. Robert M says:

    Stop Making Sense!
    The reality of socialized losses and privatized gains through public companies w/ a government back stop has to stop. If Goldman was still a partnership noone would have a thing to say because the partners money would be on the line. They would look at risk differently and wouldn’t have the ability to borrow at 0.25% and receive 3% from the same activity.
    Volker is right the only thingto come along in the last30 years of any use to the public from financial institutions is the ATM. The public shouldn’t be one for these institutions.

  33. Clay says:

    According to this report by Martin D. Weiss, PhD who cites info from 3 gov’t reports, there could be considerable risk on interest rate derivatives and/or their underlying securities, in addition to credit derivatives for banks and other investors in these securities:

    http://jutiagroup.com/2009/12/21/three-government-reports-reveal-new-looming-risk/

    Without looking at each financial entity’s assets I don’t know how he could draw some of his conclusions other than through generalized speculation. According to Weiss, banks and others are loading up their balance sheets with securities with long-term maturities, and when interest rates rise they will take write-downs on these securities. Whether they will be significant or not remains to be seen. In addition, he says the amount of CDS’s remains at a high level. Without evaluating estimated future loan defaults affecting these CDS contracts, it might be difficult to reach a reasonable logical conclusion regarding amounts of losses. He appears to think they could be substantial.

    Nonetheless, it’s food for thought.

  34. philipat says:

    Greed. That together with getting all Derivatives onto an exchange and changes to capital requirements should do quite nicely. That still leaves plenty of instruments and opportunities for Investment Banks and Hedge Funds to ply their trade and, if I am looking for a risk investment, I would put my money there. If, conversely, I just wanted a safe place to park my funds and conduct the normal bank services required by perhaps 90% plus of the population, I would go to a utility.

  35. philipat says:

    Actually meant to say “Agreed”. But on second thoughts……………………….

  36. Tarkus says:

    The financial industry always harps on the piecemeal “regulation” approach because they can use their lobbyists to try and gouge holes in the regulations, and later can work while no one is being mindful to undermine and eliminate what they could not alter prior to a bill being passed.
    Then when the spit hits the fan anyway, they can say “Oh, but we HAVE regulation, its just not enforced (just like highly publicized insider trading never catches the attention of the SEC).
    Structural change is much better. Break up TBTF. John Mack was right – they cannot control themselves, and “regulation” is not enough.
    BTW – in Hank Paulson’s testimony before Congress on AIG, he said he supported a fee to reclaim all TARP money, but only after 5-or-so years had passed to make sure the financial system had stabilized. The obvious follow-up question the Senators should have asked was ” They aren’t waiting 5 years to pay themselves bonuses – is that the timetable that should be set there also?” We have stupid Senators.

  37. just-a-thought says:

    As usual I agree with BR…but the biggest problem that needs to be resolved and eliminated is the dual mandate of the Fed…the prop trading is of minor significance compared to the disastrous affect the Fed in it’s current state has on our economy

  38. mad Albanian says:

    BR,

    you will find all the information about caanadian banks here. They are no better.
    They received significant assistance from the Canadian government. First, they received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP), whereby Canada Mortgage and Housing (CMHC) purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets. Next, the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities. Finally, a Canadian Bank (that shall remain nameless) also received assistance from the Canada Pension Plan (CPP) through the purchase of $4 billion in mortgages prior to the IMPP program, for a total government expenditure of $114 billion. For reference, the entire tangible common equity of the Canadian Banks in 2008 was $68 billion.

    And YES, canadian debt to disposable income ratio is around 140% now, compaired with 130% in the US, do some research, you will see we are worse than US.

    http://www.sprott.com/Docs/MarketsataGlance/11_09%20Dont%20Bank%20on%20the%20Banks.pdf

  39. Patrick Neid says:

    Oh look there go some horses.

    You can pass all the regs you want, randomly enforcing the ones that are politically expedient at any given time, but you will never ever stop the boom and bust cycles. It is the purging system that makes capitalism work.

    Where we continually go off the reservation is our constant intervening, especially since the 87 crash. We/politicians intervene because we can’t face the “bust” part of a necessary cycle. Consequently, slowly at first, moral hazards are planted as land mines. Welcome to today. With the massive interventions of the last two years we are planting A-bombs.

    We love the boom but hate the bust enough such that tens of millions would forgo personal freedoms to sign up with alternative isms.

  40. darkstar57 says:

    Make all the transactions on the Fedwire public record and put them in a database. This would reveal the parties who are buying and selling the derivatives (Credit default swaps, etc in the 50 trillion derivatives pool) that crashed the market. E.G. Goldman Sachs at once selling bundled mortgages and buying insurance for themselves on their failure. We would have known who bet on AIG’s failure before it happened. (check the services of federalreserve.gov, note the letters of credit that finance the bets made by the banksters)
    Every smidgen of my financial data is thinly disguised public record, and the only reason to pull a right to privacy blanket over the financial records of George Soros, Hank Paulson or Lloyd Blankfein is to allow them to purchase politicians than can make their depredations legal without being caught and prosecuted.