"Financial Regulation - Less Sniping and More Common Sense"

Sydney M. Williams

Thought of the Day

“Financial Regulation – Less Sniping and More Common Sense”

April 15, 2010

I was in Boston last night, so apologize for the tardiness of this note.

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Why is it that Washington and common sense are mutually exclusive? Yesterday the President had House and Senate leaders to the White House for a meeting to discuss the proposed financial regulation bill. The talks, as the Financial Times reports today, are a result of a pledge President Obama made in his State of the Union to hold more bipartisan meetings. Today’s New York Times reported: “Mr. Obama urged Congressional leaders to reach a bipartisan deal. But Mr. Obama also pushed back forcefully against Republican criticism.” Those observations lend credence to Daniel Henninger’s characterization of the President in today’s Wall Street Journal: “Mr. Obama by instinct is a man of feints. He finds value in seeming to be ‘open’ to any point of view, proposal or fix.” But “seeming” open and being open are two different things.

Meanwhile, as the Parties snipe at one another, reminiscent of school children at recess, Wall Street and Washington have returned to their old ways; the environment that created the crisis goes unchecked. By excluding Republicans from the proceedings the Democrats can make them the Party of “no”. Republicans, in refusing to negotiate, attempt to make the Democrats appear to be the Party that railroads through legislation. The public is getting fed up with them all.

The legislation concerns banks that abetted the crisis and are deemed “too big to fail.” Among the proposals would be the establishment of a $50 billion fund to “essentially dismantle companies that are so big their failure would endanger the economy.” Republicans think such a fund would encourage bailouts. Democrats feel such a fund would be prudent. Common sense suggests such a fund is OK, but that first officers and directors must be held financially accountable and personally liable. One is always more careful with his own money than with that of a stranger.

Democrats feel that swaps should no longer be permitted to be traded by banks. Republicans disagree. Common Sense suggests swaps – particularly credit default swaps, which are really insurance – be regulated as an insurance product and that the size of an issue should not exceed the nominal value of the underlying security. Who trades them is less important than regulation.

Senator Chris Dodd, an important factor in encouraging mortgage lending to those with limited or no means (and who has never explained his close ties to the disgraced former chairman, Angelo Mozilo, of Countrywide Credit) chose to denounce Senator McConnell’s criticism in what the New York Times described as “an angry floor speech” – no mea culpa from Connecticut’s senior Senator!

What is needed is a system that encourages entrepreneurial activity and intelligent risk taking, but without putting at risk depositors, shareholders or tax payers. Officers and directors should be held personally liable. Commercial banks should maintain a reasonable level of leverage, of ten to twelve times. They should not be permitted to trade against their customers, except for purposes of hedging. Commercial banks should consider spinning off their proprietary trading desks, perhaps to private partnerships. Private partnerships, it should be recalled, are the progenitors of today’s global banks and were more prudent when it came to speculating with their capital, because the money they risked belonged personally to them and they were each individually held liable for losses. We need regulators who regulate and Congressional members who take responsibility for their policies. The latter is probably never possible, but it should be.

Jamie Dimon, chairman of JP Morgan Chase, is right; increased regulation is a “punitive” tax, but one well worth paying for providing protection to investors and shareholders. And he doesn’t have to worry. He will pass on all costs to his depositors and shareholders. He and his employees will do just fine with tightened rules. Big egos, political infighting and the desire to make history are natural to those who serve in Washington, but those characteristics often stand in the way of doing what is right. Treasury Secretary Geithner said that he was confident the bill would be approved. “This is going to be the most sweeping legislation since those put in place after the Great Depression.” While I believe he meant during the Great Depression, it is not soaring rhetoric or historic legislation that is needed, as much as common sense solutions to problems obvious to the majority of Americans.