Saturday, March 29, 2008

Wall Street Begs To Be Rescued From Itself

~ Wall Street is begging, yes, you heard right, begging for regulation, proving even the Cannibal Captains of Capitalism know that they've gone too far and are about to devour themselves~
More on the troubling paradoxes of capitalism from the edge of the abyss
In his "Talking Business" column in the NYT, Joe Nocera reflects on the surprising support for stronger regulation than the Fed's Paulson has proposed, and Democrat Barney Frank's ideas (*gasp*) for taking a non-efficent system inherited from the Depression era (with major gutting along the way under Bill Clinton's watch), and strengthening it gathering steam, viewed with favor by major players on Wall Street:
...[Frank] "also said that capital requirements for nonbanks needed to be reassessed, that consumer protection needed to be enhanced, that mortgage originators — indeed, all lenders — should have to carry a portion of their loans on their books so that they would bear some risk if things went wrong, and that companies should be regulated not according to whether they were a bank or an investment bank or a hedge fund but whether they did things like create credit. 'We now see a situation in which more damage was done by inadequate regulation,” he said. He called for a new era of 'sensible regulation.'
"You may have noticed that when the Treasury secretary, Henry M. Paulson Jr., made his big Wall Street regulation speech a few days ago, in which he took a far more cautious — or tepid, depending on your point of view — position on the need for new regulation, he took a swipe at Democratic proposals like Mr. Frank’s, saying that most of their ideas 'are not yet ready for the starting gate.'
"But Mr. Paulson is wrong. Given Mr. Frank’s position as chairman of the central [House Financial Services] committee, his ideas are very much at the starting gate. He will hold hearings and get support, especially if the crisis deepens. Indeed, Mr. Paulson will release on Monday his own set of ideas, which were obtained Friday by The New York Times. Although his proposals are elaborate, they strike me as mainly an effort to keep new regulation to a minimum.

"And lest you think Mr. Frank’s notions for new regulation are just the knee-jerk impulse of a liberal Democrat, I can say with some authority that there is a surprising amount of support, even on Wall Street, for the idea that investment banks need more stringent regulation. That includes influential people like Byron Wien of Pequot Capital, Laurence Fink of BlackRock, the economist Alan Blinder, Allan Sinai of Decision Economics, Jamie Dimon of JPMorgan Chase, and even Larry Kudlow, the archconservative host of 'Kudlow & Company' on CNBC.
“'I think investment banks need to be regulated,' Mr. Kudlow told me flatly. He added that although he often disagreed with Mr. Frank, he felt that he was 'a good thinker and not a knee-jerk liberal'” I’ll tell you, I nearly fell off my chair.
"There are any number of problems with [the regulatory] system [as it presently exists]. One is is both duplicative and full of gaping holes. The main concern in the wake of the Depression was the banking system — so banks wound up heavily regulated. Investment banks, by contrast, were far less important to the overall financial system, so they wound up with a very different kind of regulation; in general, they can take all the risk they want with their balance sheets without the government saying boo.
"Yet over the last few decades, and especially since the abolition of the Glass-Steagall Act, the Depression-era law that separated investment banks from commercial banks, the two kinds of institutions have come to perform many of the same functions. All kinds of banklike institutions have sprung up that are largely unregulated. Mr. Sinai, the chief global economist at Decision Economics, estimates that today, only 20 percent of loans are made by regulated banks. The rest are generated by institutions that are much less regulated.
"Indeed, thanks to securitization, banks don’t have anywhere near the assets or power they used to have — while investment banks are a far larger and more powerful part of the financial system. For that reason, said Mr. Fink, the chief executive of BlackRock, the large public money manager, 'I believe, as I have for years, it is time for investment banks to be regulated.'

"Here’s another problem: the bank regulators and the securities regulators have very different mind-sets. For good reason, the Depression caused bank regulators to focus on the 'safety and soundness' of the banking system. These many decades later, that is still their major concern.
"Protecting bank customers, by contrast, has been a much less pressing concern. A number of people told me, for instance, that the Fed could have reined in mortgage lenders if it had wanted to, or cracked down on subprime loans. But the Fed chairman then, Alan Greenspan, was really quite hostile to the notion that he should be wading into the subprime market. Indeed, he thought the benefits of broader homeownership were worth the risks that subprime loans entailed. And the few regulators who tried to sound the alarm about those risks were ignored.
"The S.E.C., meanwhile, cares a great deal about consumer protection — indeed, its mandate is to protect investors — but it’s not really equipped to evaluate the safety and soundness of the investment banks it regulates.
"Lynn Turner, a former S.E.C. chief accountant, points out that the agency actually has an office of risk management, which was established a few years ago when William Donaldson was the chairman. Its job is to do precisely what Mr. Frank is proposing: make sure Wall Street firms aren’t taking on more risk than they can handle. But in its most recent annual report to Congress, the S.E.C. admitted that the office had been unable to function properly because it was plagued with staff turnover.
"Mr. Paulson’s essential position, as articulated in both his speech and the proposals he will formally unveil Monday, is that the Federal Reserve’s opening of the discount window to investment banks — an action not taken since the Depression —means that the Fed will have to have some new measure of regulatory control over investment banks. After all, the discount window makes loans to banks that are having problems — and since it’s the taxpayers’ money that is being lent, the Fed needs to be able to assess the size of the problems. He wants the Fed to be able to burrow into investment banks and scout out potential problems.
"But putting investment banks under the purview of the Fed because they have access to the discount window is about as minimal a step as one could take. And while Mr. Paulson also calls for consolidation of some regulatory agencies, he is still not tackling some central problems. His proposals won’t cover institutions like mortgage companies that make loans and then send them to Wall Street to be turned into complex securities. It won’t come to terms with the potential dangers of derivatives themselves. It won’t cause the Fed to become more consumer-friendly, or the S.E.C. to care more about the soundness of investment banks. Without serious, wholesale change, the system will still look for all the world like a Rube Goldberg contraption.
“'The system is broken,' Mr. Sinai said. 'The animal spirits of the private sector, plus lax regulation, did it in.' He is among those who believe that we need a new supervisory agency that would regulate, as he puts it, 'all the banklike institutions.' Those that took the most risk would have the biggest capital requirements — no matter whether they were investment banks or hedge funds or banks. The government would be able to examine investment banks, just as it now examines banks. Outliers like mortgage brokers wouldn’t be able to play by one set of rules while banks play by another.
"I don’t know whether a big new agency is the right way to go. The ideas that emerged from the Depression came after much thought and many Congressional hearings — and one would hope the same would happen this time.'You don’t want to rush into a new regulatory regime,' said Mr. Blinder, the former Fed board member who now teaches at Princeton. Indeed, one of the things I like about Mr. Frank’s approach is that he is not trying to rush through legislation. He has thrown out some interesting, provocative — and in many ways, quite sensible — ideas, and now he’s going to see where they lead.
"That’s hardly the approach of a knee-jerk liberal. Even Mr. Kudlow would seem to agree."
Meanwhile, it is reported last week that the employees (of the infamously "brass-knuckle," "no holds barred," "we'll put you and your little dog too through the meat grinder and serve you as barbeque") Bear Stearns were crying in the halls last Friday at the injustice of having to settle for a $2 per share stock price in the government bailout. They want at least $10! Shareholders chimed in.
They're lucky that we didn't leave them to die and go bankrupt, like we did with Drexel a decade ago. But brass-knucklers like Bear don't know how to be grateful that they've dodged a bullet and are left alive at all. With true Wall Street chutzpah and unmitigated gall, while they're still standing they think they have an absolute right and entitlement to more, more, more.
Seems they don't at all mind playing with fire as long as somebody else ~ in this case, the entire American economy~ gets burned. Take a coupla bucks away from them when they should be grateful they're still standing, and they cry like little girls. Doncha wish somebody would spank the nasty little brats but good?

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