This morning, I have an editorial in Barron’s on "Uncle Sam the enabler."
Its a memo from Wall Street to Washington D.C., discussing how all of the excesses of Wall Street were made possible by the actions in nation’s capital.
I was thrilled to publish this at Barron’s. Here’s an excerpt:
To: Washington, D.C.
From: Wall Street
Re: Credit Crisis
WOW, WE’VE MADE QUITE A MESS OF THINGS
here on Wall Street: Fannie and Freddie in conservatorship, investment
banks in the tank, AIG nationalized. Thanks for sending us your new
We on Wall Street feel somewhat
compelled to take at least some responsibility. We used excessive
leverage, failed to maintain adequate capital, engaged in reckless
speculation, created new complex derivatives. We focused on short-term
profits at the expense of sustainability. We not only undermined our
own firms, we destabilized the financial sector and roiled the global
economy, to boot. And we got huge bonuses.
But here’s a news flash for you,
D.C.: We could not have done it without you. We may be drunks, but you
were our enablers: Your legislative, executive, and administrative
decisions made possible all that we did. Our recklessness would not
have reached its soaring heights but for your governmental incompetence.
The full text is below in PDF format.
It was a pleasure working with Thom Donlan on this, who turned my blunt, meandering scribbles into a razor sharp scalpel.
A Memo Found in the Street
Uncle Sam the enabler
By BARRY L. RITHOLTZ
MONDAY, SEPTEMBER 29, 2008
The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.
The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.
Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”
“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.
Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.
On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.
The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.
But the retreat on investment bank supervision is a heavy blow to a once-proud agency whose influence over Wall Street has steadily eroded as the financial crisis has exploded over the last year.
Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.
The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.
The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.
The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.
Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities.
The commission will continue to be the primary regulator of the companies’ broker-dealer units, and it will work with the Fed to supervise holding companies even though the Fed is expected to take the lead role.
The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue.
The S.E.C. will still have primary responsibility for regulating securities brokers and dealers.
The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events.
Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape how the nation’s largest financial institutions are regulated. The report recommended, for instance, that the commission and the Fed consider tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices.
The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.
The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.
The S.E.C. approved the consolidated supervised entities program in 2004 after several important developments in Congress and in Europe.
In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.
In 2002, the European Union threatened to impose its own rules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks.
In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.
Bill King, who I have quoted many times in this space, puts forth an intelligent alternative to the two plans circulating D.C. — the DOA Paulson Bailout plan, and the even sillier House Republican Plan.
I would strongly suggest the economic staff of both Presidential candidates review this.
Here are Bill’s starting premises:
• The US credit system is broken.
• The Paulsen-Bernanke Bailout Plan does not insure that those banks and brokers that receive bailout aid will increase lending. The reality is the market is hoarding liquidity and these banks are likely to do the same. More importantly consumer lending has been a small, often insignificant part of their business. They made money by trading and through securitization of debt.
• It is necessary to create a new system parallel with the existing dysfunctional system in order to mitigate the inevitable economic and financial damage and to facilitate, as seamless as possible, the transition to a functioning financial system or new model of credit and banking.
• The Wall Street model, securitization and extreme leverage, is obsolete.
• US financial institutions need to recapitalize.
• Hank and Ben assert that it is paramount to keep credit flowing to consumers; the bail out is a necessary adjunct.
• Paulsen and Hank’s bailout plan is tantamount to bailing out Univac, Digital Equipment, etc, in the eighties, which would’ve retarded the development of Dell, Microsoft, Intel and other nascent technology companies.
• It’s wasteful & foolish to put more money in an obsolete non-functioning system
• Big banks and brokers made most of their earnings over the past several years in trading, not consumer lending. And now their derivatives are THE problem
• If you want to get money to the consumer: the less middlemen, the better.
• Decentralization of liquidity, lending and risk is necessary to refurbish the financial system. The illiquidity of a few large banks is collapsing the system.
If you missed my boy Chris Whalen of Institutional Risk Analytics on SquawkBox, you missed some seriously straight talk:
on the $700B bailout, with Chris Whalen, Institutional Risk Analytics and CNBC’s
See also: Chris Whalen of the The Institutional Risk Analyst:
Good stuff . . .
That is the perfect opening for Marion Maneker, who presents us with this guest essay. Marion is the Managing Partner at Colle, Hochberg and Grey, publishers of the Art Market Monitor. He is a former editor at New York Magazine and the Publisher at the HarperCollins business imprint. Marion has been observing the political and economic scene from a vantage point within the financial press for many years. His take is wry, sharp, and unique. I would not bet against his perspectives.
It isn’t easy being Secretary of Treasury these days. One minute you’re down on your knees begging the Congressional leadership not to blow up the world’s banking system; the next you’re fielding calls from the Chinese threatening god-knows-what if you don’t make them whole on the GSEs. Just look at the month Hank Paulson has had.
One of the effects of the market shock and bailout plan has been a renewed focus on the Secretary of the Treasury. Once a role for a worthy business figure whose job amounted to repeating the mantra “a strong dollar is in America’s interest”– usually as the dollar is sinking–the job has become something very different now and for the forseeable future. If Hank Paulson gets his way and Congress declares martial law over the financial community, the Treasury Secretary is going to be more Proconsul than cabinet functionary.
First, Paulson received nothing but praise for the way he handled the crisis; then he unveild his bailout plan. Suddenly it seemed like everyone turned against him — though Anatole Kaletsky had questioned his moves already. No matter what happens to the bailout, Paulson isn’t likely to be asked to stay on after the transition. So we have to start asking the question: who is going to be riding this tiger next?
This isn’t a question like, who would the new president appoint to the Supreme Court? Where the Treasury Secretary was once a high level consiglieri, the position is rapidly becoming a much more complex and intense job with no natural constituency . . . and little margin for error. Congress hates you; main street hates you; and pretty soon — with all that bickering as a distraction from its own misdeeds — Wall Street is going to start complaining again. As a cabinet position, it may soon overshadow the Secretary of State in political importance and be no more satisfying for the office holder than trying to make progress with the Israelis and Palestinians.
Having said that, the job is still a career capstone or a stepping stone to greatness. The speculation about the possible nominees under the next administration began a few weeks ago when the Wall Street Journal baldy asked if the Fed’s Timothy Geithner and FDIC’s Sheila Bair were leading candidates.
No disrespect to either Geithner nor Bair, both of whom look to have big careers ahead of them on either side of the public/private divide, but even a traditionalist’s view of the job would put it beyond their reach. The media focus requires some star-power, which Geithner still hasn’t got, and international experience. The GSE bailout revealed one half of the Treasury Secretary’s job: dealing with pressure from abroad. From news reports, we know that the holders of American debt–namely, government agencies for economic powerhouses like China who Daniel Gross points out currently hold mearly $1 trillion or 21.4% of the GSE debt–were on the phone with Paulson a few seeks ago demanding reassurances. Next thing we got was the Fannie/Freddie takeover.
Holding off our creditors abroad is going to take someone with real international stature and visibility. That’s why everyone is so relieved that Paulson is currently in the job. But being the former head of Goldman wasn’t always credential enough. Remember that Robert Rubin had to serve an apprenticeship in the White House while the grand old man of the Senate Finance committee, Lloyd Bentsen, kept the seat warm.