Friday, June 19, 2009

The Good, the Bad and the Ugly 2: Financial Re-regulation

All of the below come from Geithner's testimony at the Senate Banking Panel, followed by snark from me.

The Good:
Tim: We think that the best way to keep the system safe for innovation is to have stronger protections against risk with stronger capital buffers, greater disclosure so investors and consumers can make more informed financial decisions, and a system that is better able to evolve as innovation advances and the structure of the financial system changes.
Me: Exactly! More capital, more disclosure to investors and consumers so that they can make their own informed decisions (as opposed to the government telling them what they should do).

Tim: We do not believe that you can build a system based on banning individual products because the risks will simply emerge in new forms. Our approach is to let new products develop, but to bring them into a regulatory framework with the necessary safeguards. America’s tradition of innovation has been central to our prosperity.
Me: Bingo! Couldn'ta said it better myself.

Tim: This agency will be able to write rules that promote transparency, simplicity and fairness, including defining standards for “plain vanilla” products that have straightforward pricing.
Me: Hallelujah transparency. By that, he needs to mean, transparency to shareholders and customers, not to the government. Hallelujah simplicity. Financials have long made an art of turning something simple into something apparently complicated in order to eke out a few more basis points. Fairness ... well life's not fair. But he did save himself by giving regulators the task of "defining standards" as opposed to flat-out regulating these vanilla products.

Tim: We propose a new resolution authority ... that will reduce moral hazard by allowing the government to resolve failing institutions in ways that impose the costs on owners, creditors and counterparties, making them more vigilant and prudent.We must also minimize the moral hazard of institutions considered too big or too interconnected. No one should assume that the government will step in to bail them out if their firm fails.
Me: Can anyone be against reducing moral hazard? Yes, the cost should be on owners, you hypocrite.

The Bad:
Tim: lack of oversight led millions of Americans to make bad financial decisions that emerged at the heart of our current crisis.
Me: Totally disagree. It allowed perhaps, but then again many Americans (apparently excluding the current administration) believe that people are responsible for their own actions. If you believe that, then you do not believe laws should be made to save people from themselves.

The Ugly:
Tim: Most importantly, it will have the power to gather information from any firm or market to help identify emerging risks.
Me: Big Brother has achieved new heights. We need to be honest with ourselves: regulators already have access to a VAST sea of information from banks. Financials face a daily barrage of invasive info requests from various aspects of the government. Some is mandatory, but the really sticky bits are often given voluntarily by Financials in the name of fostering a good regulatory relationship. Firms are aware that that those who say "show me a subpoena" too often find themselves facing suffocating levels of government scrutiny in subsequent years. That cozy relationship is part of what got us into this mess. Its a sad statement on our lawmakers that financial regulation is worded soo ambiguously that enforcement is a matter of personal interpretation. Moreover, it's repugnant that the level of enforcement is based on how much a firm kisses their regulator's ass (ahem Chase!) rather than any objective criteria. What makes Tim's line so scary to me is that he's tossing aside any pretense that financials have any property rights over their own intellectual property (data). For any reason, from any firm, the government can gather any information. Period.

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