business as usual
October 22, 2009 8:00 AM Subscribe
Liquor before Beer... In the Clear
In case you thought anything has changed since the Global Financial Crisis, Greenlight Capital's David Einhorn delivered a remarkable speech at the Value Investing Congress Monday [background, excerpts] wherein he lays out what's still wrong with (the culture that is) Wall Street and Washington: "the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency." On a related note, the BOE's Mervyn King concurs with Einhorn: "To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform."
In case you thought anything has changed since the Global Financial Crisis, Greenlight Capital's David Einhorn delivered a remarkable speech at the Value Investing Congress Monday [background, excerpts] wherein he lays out what's still wrong with (the culture that is) Wall Street and Washington: "the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency." On a related note, the BOE's Mervyn King concurs with Einhorn: "To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform."
I struggle to know how you would "reform" a culture that is governed by the single-minded ambition to come out on top. What short of external constraint would curb anything?
I can remember when two small, regional banks had headquarters in Montgomery, Alabama--and provided numerous jobs. Those jobs all migrated first to Birmingham, then to North Carolina, and now to God-knows-where.
posted by jefficator at 8:21 AM on October 22, 2009
I can remember when two small, regional banks had headquarters in Montgomery, Alabama--and provided numerous jobs. Those jobs all migrated first to Birmingham, then to North Carolina, and now to God-knows-where.
posted by jefficator at 8:21 AM on October 22, 2009
I thought this was going to be another asavage shoutout.
posted by mbd1mbd1 at 8:23 AM on October 22, 2009 [1 favorite]
posted by mbd1mbd1 at 8:23 AM on October 22, 2009 [1 favorite]
The problem, as I see it, is that nearly anyone with the "power" (i.e. wealth) to change the "culture" (i.e. the financial system) has a vested interested in maintaining said "culture," even this guy, who rationally outlines a number of problems with the current proposed financial "reform" ... and then tries to analyze those problems to evaluate investment opportunities. :|
Or what jefficator just said.
Short-termism is not only limited to the financial industries. It may be our species' Achilles' heel.
I wonder what Stan Druckenmiller thinks.
posted by mrgrimm at 8:27 AM on October 22, 2009 [1 favorite]
Or what jefficator just said.
Short-termism is not only limited to the financial industries. It may be our species' Achilles' heel.
I wonder what Stan Druckenmiller thinks.
posted by mrgrimm at 8:27 AM on October 22, 2009 [1 favorite]
or as a wiser man said:
"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
...
All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard."
posted by mrgrimm at 8:34 AM on October 22, 2009 [3 favorites]
"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
...
All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard."
posted by mrgrimm at 8:34 AM on October 22, 2009 [3 favorites]
"Okay, so the myth is that in a free market, wages, employment and prices rise and fall to appropriate levels as if directed by an invisible hand, thus regulating themselves, making government intervention superfluous at best!"
posted by mccarty.tim at 8:40 AM on October 22, 2009
posted by mccarty.tim at 8:40 AM on October 22, 2009
What sort of external constraint would curb anything?
Short of firearms?
posted by Thorzdad at 8:40 AM on October 22, 2009
Short of firearms?
posted by Thorzdad at 8:40 AM on October 22, 2009
It may be our species' Achilles' heel.
Our species' Achilles' heel is our precisely our success. We've beaten the game, and that is what's destroying us.
In every other species on earth, various evolutionary adaptations seem to work solely to the species' benefit. But we are uniquely capable of modifying our environment to the extent that our own adaptations are killing us.
In nature, calories are precious and rare, so we've evolved to crave calorie-dense foods. That's all well and good on the savanna, but we've engineered our environment such that for the first time in history, calorie-rich foods are more accessible than calorie-poor/nutrient-rich foods. We're the evolutionary decedents of people whose bodies could survive on grasses and berries and the occasional bite of meat, but now we eat only cheeseburgers and sugar water. For all the guilt culture wants to heap on the obese--and my God, if I hear one more skinny blond bitch kvetching about how fat Oprah's getting--we're fighting millions of years of natural selection.
We also want to sit rather than stand, be transported rather than walk, be cool and dry rather than hot or cold and wet. Every other species meets these desires with temporary solutions. We, on the other hand, have mastered our environment and the mastery is our downfall. There's a modern Greek tragedy in that, waiting to be written.
I simply cannot conceptualize a means of saying to Wall Street, "Regulate yourself." This is illogical. It is illogical because any company that refuses to do so (paging Goldman Sachs?) will automatically have an advantage over everyone else. (Which is why climate change accords always fail. China anyone?) It is also illogical because these companies can't be of two minds. They can't simultaneously seek unfettered gains AND seek to ensure the survival of the overall system. Wall Street "Companies" are collections of individuals whose sole occupation is "make the most money as fast as possible." No one goes to Wall Street because they love the idea of capitalism or because numbers fascinate them. Those people become professors and accountants. People go to Wall Street to make donkey-choking wads of cash as quickly as possible. Whole system goes to shit two weeks later? What do I care? I've got my wad of cash and I'm already strangling Eeyore.
Constraint must be external or it doesn't exist at all. This is true in nature, and its true on Wall Street.
posted by jefficator at 8:48 AM on October 22, 2009 [11 favorites]
Our species' Achilles' heel is our precisely our success. We've beaten the game, and that is what's destroying us.
In every other species on earth, various evolutionary adaptations seem to work solely to the species' benefit. But we are uniquely capable of modifying our environment to the extent that our own adaptations are killing us.
In nature, calories are precious and rare, so we've evolved to crave calorie-dense foods. That's all well and good on the savanna, but we've engineered our environment such that for the first time in history, calorie-rich foods are more accessible than calorie-poor/nutrient-rich foods. We're the evolutionary decedents of people whose bodies could survive on grasses and berries and the occasional bite of meat, but now we eat only cheeseburgers and sugar water. For all the guilt culture wants to heap on the obese--and my God, if I hear one more skinny blond bitch kvetching about how fat Oprah's getting--we're fighting millions of years of natural selection.
We also want to sit rather than stand, be transported rather than walk, be cool and dry rather than hot or cold and wet. Every other species meets these desires with temporary solutions. We, on the other hand, have mastered our environment and the mastery is our downfall. There's a modern Greek tragedy in that, waiting to be written.
I simply cannot conceptualize a means of saying to Wall Street, "Regulate yourself." This is illogical. It is illogical because any company that refuses to do so (paging Goldman Sachs?) will automatically have an advantage over everyone else. (Which is why climate change accords always fail. China anyone?) It is also illogical because these companies can't be of two minds. They can't simultaneously seek unfettered gains AND seek to ensure the survival of the overall system. Wall Street "Companies" are collections of individuals whose sole occupation is "make the most money as fast as possible." No one goes to Wall Street because they love the idea of capitalism or because numbers fascinate them. Those people become professors and accountants. People go to Wall Street to make donkey-choking wads of cash as quickly as possible. Whole system goes to shit two weeks later? What do I care? I've got my wad of cash and I'm already strangling Eeyore.
Constraint must be external or it doesn't exist at all. This is true in nature, and its true on Wall Street.
posted by jefficator at 8:48 AM on October 22, 2009 [11 favorites]
jefficator, may I gently suggest that you're confusing species with nations, in your comment? What you say is certainly true for large sections of the first world, but what about the second and third worlds? I wouldn't say, for example, that large numbers of people living in third world countries have mastered their environment.
posted by LN at 9:06 AM on October 22, 2009
posted by LN at 9:06 AM on October 22, 2009
Hate to say it because I'm generally NOT an overt pessimist but the more I consider Wall Street etc and its ability to regulate itself, the more I think of European history up until the end of WW2. That is, despite all the cries of "we've got to figure out how to do business with each other without resorting to all out WAR and babarism," there was always another more barbaric war ...
Until the two great cataclysms of the 20th century laid pretty much laid the entire continent to waste, an Armageddon if ever the world has seen one.
Since then, it's been mostly rational (in the west at least). People are talking, borders are dissolving, nobody's even threatening WAR. I guess it's like we always say with drug addicts and alcoholics: no hope for serious change until you hit rock bottom.
posted by philip-random at 9:22 AM on October 22, 2009 [1 favorite]
Until the two great cataclysms of the 20th century laid pretty much laid the entire continent to waste, an Armageddon if ever the world has seen one.
Since then, it's been mostly rational (in the west at least). People are talking, borders are dissolving, nobody's even threatening WAR. I guess it's like we always say with drug addicts and alcoholics: no hope for serious change until you hit rock bottom.
posted by philip-random at 9:22 AM on October 22, 2009 [1 favorite]
That Einhorn speech is nicely written. Thanks for the link kliuless.
posted by storybored at 9:57 AM on October 22, 2009
posted by storybored at 9:57 AM on October 22, 2009
Another take on the matter:
In remarks that will fuel the row around excessive pay, Lord Griffiths, vice-chairman of Goldman Sachs International and a former adviser to Margaret Thatcher, said banks should not be ashamed of rewarding their staff.posted by scalefree at 10:30 AM on October 22, 2009 [1 favorite]
Speaking to an audience at St Paul’s Cathedral in London about morality in the marketplace last night, Griffiths said the British public should “tolerate the inequality as a way to achieve greater prosperity for all” [...]
With public anger mounting at the forecast of bumper bonuses for bankers only a year after the industry was rescued by the taxpayer, he said bankers’ bonuses should be seen as part of a longer-term investment in Britain’s economy. “I believe that we should be thinking about the medium-term common good, not the short-term common good … We should not, therefore, be ashamed of offering compensation in an internationally competitive market which ensures the bank businesses here and employs British people,” he said.
Griffiths said that many banks would relocate abroad if the government cracked down on bonus culture. “If we said we’re not going to have as big bonuses or the same bonuses as last year, I think then you’d find that lots of City firms could easily hive off their operations to Switzerland or the far east,” he said.
Griffiths said that many banks would relocate abroad if the government cracked down on bonus culture. “If we said we’re not going to have as big bonuses or the same bonuses as last year, I think then you’d find that lots of City firms could easily hive off their operations to Switzerland or the far east,” he said.
So in other words, it's not that the current bank employees offer a better quality of work than foreign competitors, but rather that they'd be unwilling to do the work for less money. After all, if they could compete on quality, then there would be no fear of the jobs heading overseas, given equal pay.
"I believe that we should be thinking about the medium-term common good, not the short-term common good … We should not, therefore, be ashamed of offering compensation in an internationally competitive market which ensures the bank businesses here and employs British people"
Why exactly should investment bankers be treated differently than, say, autoworkers or mill operators? Why is it so crucial to give British (or American) investment bankers inflated salaries and bonuses in order to keep British and American investment banks propped up? Why are investment banks immune to the law of comparative advantage? I suggest that they are not and this Griffiths fellow is just trying to stay on the gravy train.
posted by jedicus at 11:05 AM on October 22, 2009 [5 favorites]
So in other words, it's not that the current bank employees offer a better quality of work than foreign competitors, but rather that they'd be unwilling to do the work for less money. After all, if they could compete on quality, then there would be no fear of the jobs heading overseas, given equal pay.
"I believe that we should be thinking about the medium-term common good, not the short-term common good … We should not, therefore, be ashamed of offering compensation in an internationally competitive market which ensures the bank businesses here and employs British people"
Why exactly should investment bankers be treated differently than, say, autoworkers or mill operators? Why is it so crucial to give British (or American) investment bankers inflated salaries and bonuses in order to keep British and American investment banks propped up? Why are investment banks immune to the law of comparative advantage? I suggest that they are not and this Griffiths fellow is just trying to stay on the gravy train.
posted by jedicus at 11:05 AM on October 22, 2009 [5 favorites]
Why Wall Street Reform is Stuck in Reverse
posted by HP LaserJet P10006 at 1:21 PM on October 22, 2009
posted by HP LaserJet P10006 at 1:21 PM on October 22, 2009
The reform proposal to create a CDS clearing house does nothing more than maintain private profits and socialized risks by moving the counter-party risk from the private sector to a newly created too-big-to-fail entity.
But ... I thought socialism was GOOD?
posted by ZenMasterThis at 3:38 PM on October 22, 2009
But ... I thought socialism was GOOD?
posted by ZenMasterThis at 3:38 PM on October 22, 2009
You can't buy a toaster in America that has a one in five chance of exploding. But you can buy a mortgage that has a one in five chance of exploding.
posted by HP LaserJet P10006 at 5:17 PM on October 22, 2009
posted by HP LaserJet P10006 at 5:17 PM on October 22, 2009
Munchau on Minsky: Things are Worser
also see...
-The Real Reason the Giant, Insolvent Banks Aren’t Being Broken Up
-A New Civil Rights Movement is Afoot for the Middle Class
and btw re: no hope for serious change until you hit rock bottom...
Millennial Crisis – The Fourth Turning Has Arrived
cheers!
posted by kliuless at 6:27 PM on October 22, 2009
Our present situation can give rise to two scenarios - or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.like could we be witnessing the limits of central banking?
Alternatively, central banks might prioritize financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises - a bond market crash - to be followed by depression and deflation.
In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.
For all we know, there may not be a safe way down.
also see...
-The Real Reason the Giant, Insolvent Banks Aren’t Being Broken Up
-A New Civil Rights Movement is Afoot for the Middle Class
and btw re: no hope for serious change until you hit rock bottom...
Millennial Crisis – The Fourth Turning Has Arrived
My sole purpose one and a half years ago when I started writing about what I saw happening in this country was to convince enough people that the fiscal and foreign policies of our politician leaders would lead to disaster, so that we could change our path and I could leave my three sons a future brighter than my own. I have come to the conclusion that less than 1% of Americans or 3 million people really care about the path of destruction we are on. Approximately 1% of the population owns 90% of the wealth in the country. The actual number of people in control of the country is quite small. There are maybe a couple thousand people who control the reins of power (100 people in the White House, 535 Congressmen, 50 bankers, 20 people in the Federal Reserve, 9 Supreme Court justices, 100 people in power at governmental agencies, 50 media titans, 100 corporate CEOs, and maybe 200 rich influential people such as Gates, Soros and Buffett).a bit alarmist perhaps, esp after the woo-woo cycles intro (american pie interpretation), and yet and yet while i've read and seen enough [(post-)apocalyptic books and movies] to be kinda cynical about humanity's chances and skeptical of doomsayers' claims, i find it's hard to dismiss kunstler/klaresque long emergency/resource war(nings) -- altho still being wary and weary of them -- given the apparent idiocracy, despite hope, change & awesomeness :P
The majority of Americans are oblivious to the Crisis that has already begun. They are distracted by their latest text message, shopping at the mall, worried about the next credit card bill, engrossed by the adventures of balloon boy, and trusting that their elected officials know what is best for them. What will blind side them is the depth and ferocity of the next stage in the Crisis. They will need to choose sides when the time comes. I will choose the side of truth, freedom, liberty, and adherence to the U.S. Constitution as it was written. This old man will join his three sons at the barricades when the time comes. The fools and fanatics who run this country are certain. I am not certain of the final outcome, but I know which side I’ll choose. Do you?
cheers!
posted by kliuless at 6:27 PM on October 22, 2009
No one goes to Wall Street because they love the idea of capitalism or because numbers fascinate them. Those people become professors and accountants.
Jefficator - I agree with everything you said except this. Accounting is for generally for arithmetic types who like putting tables and shit together, but truthfully most choose the career because it's got a good pay:stability ratio (you don't get much more conservative or stable than accounting). You don't need to know ANY basic calculus to do accounting, much less any entry level Keynsian economics theory. In contrast, the quant types at investment banks and hedge funds tend to come from PHD backgrounds in math, economics, statistics, probability theory, etc. They do it for the money, of course, but also out of curiosity, as the financial world is at its core an on-going mathematical problem: that of pricing, modeling, and forecasting.
I mean, just look at mutant. He's got financial research papers and abstracts flowing out of his ears in his posts, and that shit is HARD to understand.
posted by chalbe at 9:22 PM on October 22, 2009
Jefficator - I agree with everything you said except this. Accounting is for generally for arithmetic types who like putting tables and shit together, but truthfully most choose the career because it's got a good pay:stability ratio (you don't get much more conservative or stable than accounting). You don't need to know ANY basic calculus to do accounting, much less any entry level Keynsian economics theory. In contrast, the quant types at investment banks and hedge funds tend to come from PHD backgrounds in math, economics, statistics, probability theory, etc. They do it for the money, of course, but also out of curiosity, as the financial world is at its core an on-going mathematical problem: that of pricing, modeling, and forecasting.
I mean, just look at mutant. He's got financial research papers and abstracts flowing out of his ears in his posts, and that shit is HARD to understand.
posted by chalbe at 9:22 PM on October 22, 2009
They do it for the money, of course, but also out of curiosity, as the financial world is at its core an on-going mathematical problem: that of pricing, modeling, and forecasting.
I mean, just look at mutant. He's got financial research papers and abstracts flowing out of his ears in his posts, and that shit is HARD to understand.
Oh please, just because the Rich People's Casino Inc. has more games and rules than the average Las Vegas operation, it deserves some sort of academic respect because it's built and intended to be so purposely complex?
The whole thing is EXTEMELY simple: The rich people lost their money on bad bets at the Rich People's Casino and now the poor and stupid taxpayers have to pay up, or ELSE (they threaten)... or else they'll starve you and your children to death.
Then won't you feel bad, eh?
posted by peppito at 11:16 PM on October 22, 2009
I mean, just look at mutant. He's got financial research papers and abstracts flowing out of his ears in his posts, and that shit is HARD to understand.
Oh please, just because the Rich People's Casino Inc. has more games and rules than the average Las Vegas operation, it deserves some sort of academic respect because it's built and intended to be so purposely complex?
The whole thing is EXTEMELY simple: The rich people lost their money on bad bets at the Rich People's Casino and now the poor and stupid taxpayers have to pay up, or ELSE (they threaten)... or else they'll starve you and your children to death.
Then won't you feel bad, eh?
posted by peppito at 11:16 PM on October 22, 2009
So the bottom-line advice — given that most of us are not really in a position to actually stop or even influence in any significant way the course of the country — is "buy gold"?
Seems a little late for that, for most individual investors anyway. Buying into gold, if you didn't do it back in the early 2000s, would seem to involve significant risk now: if for some reason the world financial system doesn't implode, you may end up buying high and selling low later.
The price of gold is up over 1000 right now, and it's been put there mostly by the exact concerns that are outlined in the article: USD inflation expectations and maybe a bit of default fears. So that would suggest to me that most of the risk has already been priced in. Unless you think that the market isn't taking either inflation or the default risk seriously enough, i.e. that the market is underpricing gold, then the ship has probably sailed.
Plus, buying gold now strikes me as a bet with a very narrow window for a payoff. On one side, you're betting that the US financial system goes to hell thoroughly enough that the already-high price of gold (built on current fears) turns out to be low. But you're also betting that the system doesn't go so far down the tubes that you're unable to collect on or otherwise profit from your investment. Not only does this imply that things can't go totally TEOTWAWKI (if you're hiding out in your basement hiding from gangs of looters, your portfolio probably won't be the first thing on your mind), but it also means no repeat of Executive Order 6102 or similar shenanigans aimed at preventing a dollar collapse.
It strikes me as possibly being a valid hedge for diversification purposes, but certainly not a safe bet.
posted by Kadin2048 at 12:19 AM on October 23, 2009 [1 favorite]
Seems a little late for that, for most individual investors anyway. Buying into gold, if you didn't do it back in the early 2000s, would seem to involve significant risk now: if for some reason the world financial system doesn't implode, you may end up buying high and selling low later.
The price of gold is up over 1000 right now, and it's been put there mostly by the exact concerns that are outlined in the article: USD inflation expectations and maybe a bit of default fears. So that would suggest to me that most of the risk has already been priced in. Unless you think that the market isn't taking either inflation or the default risk seriously enough, i.e. that the market is underpricing gold, then the ship has probably sailed.
Plus, buying gold now strikes me as a bet with a very narrow window for a payoff. On one side, you're betting that the US financial system goes to hell thoroughly enough that the already-high price of gold (built on current fears) turns out to be low. But you're also betting that the system doesn't go so far down the tubes that you're unable to collect on or otherwise profit from your investment. Not only does this imply that things can't go totally TEOTWAWKI (if you're hiding out in your basement hiding from gangs of looters, your portfolio probably won't be the first thing on your mind), but it also means no repeat of Executive Order 6102 or similar shenanigans aimed at preventing a dollar collapse.
It strikes me as possibly being a valid hedge for diversification purposes, but certainly not a safe bet.
posted by Kadin2048 at 12:19 AM on October 23, 2009 [1 favorite]
Griffiths said that many banks would relocate abroad if the government cracked down on bonus culture.
I'm sure their employees would have no problem at all with relocating to a third world country, leaving behind friends and family, policemen and firemen and libraries and traffic codes, leaving all the fringe benefits civilization provides for the hopes of unbridled riches.
Because if it were as simple as move to Switzerland, companies would have already done it. But they haven't. Because they can't.
You can't threaten to take the ball away when you're addicted to the game, and no one else is playing.
posted by Civil_Disobedient at 5:17 AM on October 23, 2009
I'm sure their employees would have no problem at all with relocating to a third world country, leaving behind friends and family, policemen and firemen and libraries and traffic codes, leaving all the fringe benefits civilization provides for the hopes of unbridled riches.
Because if it were as simple as move to Switzerland, companies would have already done it. But they haven't. Because they can't.
You can't threaten to take the ball away when you're addicted to the game, and no one else is playing.
posted by Civil_Disobedient at 5:17 AM on October 23, 2009
What an excellent speech. Breaking up bulky financial firms until they are not "too big to fail" in order to avoid another meltdown seems so reasonable.
posted by ejoey at 10:23 PM on October 23, 2009
posted by ejoey at 10:23 PM on October 23, 2009
speaking of remarkable speeches, here's banks' big brother ben bernanke...
---
* he's actually been hinting at this for awhile (from a 2004 interview) - "It's extremely important for central banks, or for financial supervisory agencies in those countries that have them, to ensure that the underlying microeconomic regulatory structure is such that moral hazard and misalignment of incentives are not pervasive in the system... my very first speech as a governor. I suggested that, from a policy perspective, there are two ways to approach bubbles: One is interest rate policy, the other is micro-regulatory policy. Micro-regulatory policy is the much better approach, in my view"
** "Barclays chief warns on regulation" &c.
posted by kliuless at 4:56 PM on October 24, 2009
For our part, the Federal Reserve is participating in a range of joint efforts to ensure that large, systemically critical financial institutions hold more and higher-quality capital, improve their risk-management practices, have more robust liquidity management, employ compensation structures that provide appropriate performance and risk-taking incentives, and deal fairly with consumers. On the supervisory front, we are taking steps to strengthen oversight and enforcement, particularly at the firmwide level, and we are augmenting our traditional microprudential, or firm-specific, methods of oversight with a more macroprudential, or systemwide, approach that should help us better anticipate and mitigate broader threats to financial stability.sounds like the fed up banks' asses, but looking at off-B/S, contingent and derivative exposures, within firm, with others and internationally? like banks may have passed their 'stress tests' relatively easily, but it seems like cavity searches all around: "Building on the success of this initiative, we will conduct more frequent, broader, and more comprehensive horizontal examinations..."
Although regulators can do a great deal on their own to improve financial regulation and oversight, the Congress also must act. We have seen numerous instances when weaknesses and gaps in the regulatory structure itself contributed to the crisis, many of which can only be addressed by statutory change. Notably, to promote financial stability and to address the extremely serious problem posed by firms perceived as "too big to fail," legislative action is needed to create new mechanisms for oversight of the financial system as a whole; to ensure that all systemically important financial firms are subject to effective consolidated supervision; and to establish procedures for winding down a failing, systemically critical institution without seriously damaging the financial system and the economy.
...consolidated supervision, particularly at large, complex organizations, so that supervisors can properly understand risks and exposures that cross legal entities and business lines. Second, we must combine a systemwide, or macroprudential, perspective with firm-specific risk analysis to better anticipate problems that may arise from the interactions of firms and markets. To support these approaches, we are strengthening our supervisory processes to include analyses that draw on multiple disciplines, updated surveillance tools, and more timely information so that supervisors can identify emerging risks sooner... recent experience confirms the value of supervision of financial holding companies--especially the largest, most complex, and systemically critical institutions--on a consolidated basis, supplementing the supervision that takes place at the level of the holding company's subsidiaries. Large financial institutions manage their businesses in an integrated manner with little regard for the corporate or national boundaries that define the jurisdictions of functional supervisors...so apparently bernanke's trying to get tough and wants teeth from congress so that banks respect his authoritay
Because financial, operational, and reputational linkages span large and complex financial firms, the risks borne by such firms cannot be adequately evaluated through supervision focused on individual subsidiaries alone. Instead, effective supervision must involve greater coordination among consolidated and functional supervisors and an integrated assessment of risks across the holding company and its subsidiaries... Strengthened consolidated supervision also supports improved oversight of institutions' compliance with consumer protections. Indeed, building on a pilot project we launched in 2007, we recently announced a consumer compliance examination program for nonbank subsidiaries of bank holding companies, as well as of foreign banking organizations.
Though the Federal Reserve and other supervisors in the United States and abroad are strengthening the existing regulatory and supervisory framework, it remains critical for the Congress to close regulatory gaps and provide supervisors with additional tools for anticipating and managing systemic risks... Any resolution costs incurred by the government should be paid through an assessment on the financial industry and not borne by the taxpayers.finally, while we may not be moving to a (socialist) centrally-planned economy per se, it does appear that bernanke really wants to set up a sort of gosplan for controlling the levers of the financial system; by their oversight of 'systemic' risks, they will not only be setting prices for short-term money, but underlying credit risks as well*
The Federal Reserve supports the creation of a systemic oversight council... The council could be charged, among other things, with monitoring risk exposures that cut across firms and markets; analyzing potential spillovers among financial firms or between firms and markets that could lead to financial contagion; identifying regulatory gaps; coordinating the responses of its member agencies to emerging systemic risks; identifying systemically important firms; and periodically reporting to the Congress and the public about emerging systemic risks and recommended approaches for dealing with those risks. In addition, to further encourage a more comprehensive and holistic approach to financial oversight, all federal financial supervisors and regulators--not just the Federal Reserve--should be directed and empowered to take account of risks to the broader financial system as part of their normal oversight responsibilities.the bank lobby is going to resist -- they already are** -- but i would take bernanke at his word and not underestimate what he wants and intends to get and for congress to oblige; the takeaway for me is what el-erian spelled out: "markets are pricing a return to the previous paradigm for the banking system – call it the 'old normal'. Yet the likelihood is for a 'new normal' in which more dominant utility-like functions translate into an average return on equity (ROE) in the low teens, as opposed to the 20s." we'll see...
---
* he's actually been hinting at this for awhile (from a 2004 interview) - "It's extremely important for central banks, or for financial supervisory agencies in those countries that have them, to ensure that the underlying microeconomic regulatory structure is such that moral hazard and misalignment of incentives are not pervasive in the system... my very first speech as a governor. I suggested that, from a policy perspective, there are two ways to approach bubbles: One is interest rate policy, the other is micro-regulatory policy. Micro-regulatory policy is the much better approach, in my view"
** "Barclays chief warns on regulation" &c.
posted by kliuless at 4:56 PM on October 24, 2009
Lesson Not Learned: On Redesigning Our Current Financial System
Midnight Candles
The Uncomfortable Dance Between V'ers and U'ers
posted by kliuless at 6:54 PM on November 1, 2009
Midnight Candles
The Uncomfortable Dance Between V'ers and U'ers
posted by kliuless at 6:54 PM on November 1, 2009
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Grape or grain, but never the twain.
Liquor in the front, poker in the rear.
What's this all about now?
In all seriousness, liquor, then beer, for fine tuning.
posted by mrgrimm at 8:08 AM on October 22, 2009