Short-term thinking on regulatory reform

Stuck in traffic a few days ago, I listened to the Secretary of the Treasury talking about regulatory reform. Usually I pay no attention to the black magic the Fed is performing, the obscure financial instruments dreamed up by greedy quants on Wall Street, the shenanigans of bankers testing the limits of the law, and the ups and downs of the financial markets. When it’s not the same old story over and over, it’s a random walk, and in either case I find it boring.

However, irresponsibility in high government office does arouse my crap detectors. Why, in the dying days of the most disastrous administration in American history, would we even consider re-structuring the entire regulatory framework?

The gang in Washington has a legacy of botching whatever they lay their hands on and using yours and my money to pay for it. Consider the reaction to 9/11. The horse was out of the barn. So we reacted by building a $100 billion barn door just in case there were any other horses still in there. Then we drove future terrorist bombers to our railroads, water supply, shopping malls, stadiums, and other unguarded areas by populating the airports with the TSA’s Keystone Kops. One nutjob stuffs explosives in his shoe and now millions of us have to take our shoes off to get on an airplane. Seeking retribution for 9/11, we declare war on terrorists and start an illegal war with Iraq even though it wasn’t their terrorists who destroyed the World Trade Center. My level of confidence in Washington has never been lower.

The latest horse to escape the barn is the massive losses attributable to loaning money to people without the means to pay it back. The house of cards crumbled when markets stopped going up. Financial institutions thought they could somehow outwit the balance of risk and reward by letting Citicorp and its brethren hold the bag if loans went south. The greater fool theory only works when that fool has extremely deep pockets. Here’s news for the financial hotshots: There’s no free lunch. Rising markets cannot defy gravity forever. Ever hear the term cyclical?

The mortgage horse has left the barn, sacked the dollar, cost many citizens their homes, and thrown financial institutions out of kilter. So the Secretary of the Treasury wants to restructure financial regulation, put investment banks under the microscope, dismantle the SEC, give the Fed more than it can handle, and heaven knows what else. That’s the new multi-billion dollar barn door, and it’s the wrong cure for the wrong problem.

Markets are a series of checks and balances. The current regulators let the checks be cashed regardless of the balances. Duh. Why should we trust these characters to implement a new system? Why not enforce the old one?

Let’s define the problem before crafting the solution. Appointing a risk czar reminds me of the drug czars who have wasted countless sums while exacerbating the problems they were supposed to solve. We have a security czar, a cybersecurity czar, an intelligence czar, a counterintelligence czar, an AIDS czar, a trade czar, a mine safety czar, and I’m confident someone will propose the appointment of a czar of czars even though the age of kings and czars is over. Saying “Joe’s in charge of that” is not comforting when Joe the Czar doesn’t have a clue.

Let’s wait until we have a new administration in place. It’s not healthy for the architects to wash their hands of the design as soon as the blueprints are passed along to the builders.

Finally, if you were looking for an unbiased, level-headed visionary to orchestrate the restructuring of the banking and securities markets, would you really choose the former head of Goldman Sachs?

Can Henry Paulson identify with the needs of the people? He’s worth $700 million.

Goldman Sachs is a great firm, but can its former boss remain neutral in an industry he helped put together?

Allan Sloane in The Washington Post stated that one of Goldman’s 2006 crop - the GSAMP Trust 2006- S3 - may actually be “the worst deal…floated by a top-tier firm.” One in every six of the 8,274 mortgages bundled together in GSAMP Trust 2006-S3 was already in default 18 months later. Whoever bought the S3 bonds will have either taken a 100% loss, or are waiting to sell it on at a heavy discount. [39]