Banks need to be treated like children

Henry Paulson “hints” that loaning money to non-FDIC investment banks might require some government scrutiny(3/26/8 – “… trade-off for this subsidized funding is regulation tailored to protect the taxpayers from moral hazard ….” ??? Hmmm, ….

This is like the fox recommending increased security for the hen house. Something just doesn’t smell quite right. I think he must be bracing the tax-payers for the next dominos in the Bear-Stearns chain. Tax-payers will start questioning the “bail-out”, and Hank can say the trade-off for this is increased “transparency”. Is this a “Win-Win” for the taxpayer, and just what is a “moral hazard” anyway ? Although there appears to be no Long Term Capital Management on the radar, why do the hedge funds remain so “un-roiled” ??

No, they don’t need more regulation. This debacle will make them more cautious until the next debacle. Let them go bankrupt and let hedge funds or private equity firms pick up their assets on the cheap.

Survival of the fittest is the genius of the capitalist system. Let the dunderheads go under.

Forward this to “Bail-Us-Out-Ben”: I need one more bubble to get me out of this mess. I didn’t cash in on Techs, housing, gold, and now I’ve missed meteorites. Just one more little bubble to tied me over. Pick a hot buzzword: Biomass, Solar Energy, Titanium, Hybrid, Green, Global, Gene Therapy, Gene Simmons, Derivatives, ETFs, Swaps, Turbo Warrants, Artichoke Seeds, etc. It doesn’t matter: just pick something that hasn’t been used yet, and LET ME KNOW AHEAD OF TIME !!

The reality is that we need to regulate these entities because they have demonstrated in multiple instances that they cannot be trusted to self-regulate AND their impact on the economy is too large for the government to simply let the free market render its verdict. As such, appropriate structures need to be put in place to eliminate the chance these kinds of abuses are able to take hold. Otherwise, the profits go to the perpetrators but the costs of failure are borne by taxpayers.

In general, I’m not in favor of regulation. However, after all the de-regulation of the banking industry over the past number of decades, it is time to reassess.

In 1990 the Fed permitted the bank J.P. Morgan to sell stock through a subsidiary, limited to 10 percent of the company’s total revenue. In 1996 this ceiling was lifted to 25 percent.

That limit was abolished in 1999. The Financial Services Modernization Act lifted restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933. Under the old law, banks, brokerages and insurance companies were barred from entering each others’ industries, and investment banking and commercial banking were separated. This way if one sector bombed, the others would be relatively safe.

The 1999 bill tied the banks and the insurance industry to the stock market, virtually guaranteeing that any significant plunge on Wall Street will have an impact throughout the US financial system, and vice versa.

There is a recent experience that serves as a cautionary tale. The Reagan administration passed a financial deregulation bill 1980s, lifting many restrictions on the activities of savings and loans. The result? The biggest financial bailout in US history – over $500 billion.

It’s time to go back to pre-1990. After all, the multitudinous investment and banking shenanigans of the 1920’s helped cause the Great Depression. (So did inequity in pay – but that’s another story that parallels today’s US economy.)

Um, John, what you recommend is exactly regulation. Limiting CEO pay is as much regulation as any other way to make sure these companies behave more responsibly.

Either way, I don’t necessarily think more regulation is needed. But bailouts should not be free. If the company is bailed out, as soon as it’s functional again, all profits need to go to the government until it’s paid back for the cost of the bailout (plus interest). This way, companies are still free to operate how they want, but they’ll have an incentive to avoid recklessness as a bailout will mean the stock price will languish for a long time until the government’s paid back and profits can stay within the company.

The banking,mortgage and insurance industries have proven again that you can’t trust the wolves in the henhouse, and it was proven by no less than the free marketeers of Wall Street

Please, God, no more regulation. Of course one would expect a liberal to want to expand their ever reaching power over yet another industry. Here is a novel idea: make the CEOs who flee the scene forego the huge “thank you” payments and make them pay 25% of their personal fortune to those who were negatively impacted by their poor leadership. Also, toss the board of directors and require each director, who as a group vote on these ridiculous severeance packages, pay 25% of their personal fortune to those affected. I’m all for the capitalistic economic structure we have in America, but corruption at this level is outrageous. Nothing will change until the investing public, with the backing of current regulatory bodies (no need in creating new ones), demand corporate tycons pay where it hurts them. After all, thousands of investors have had their net worth reduced because some CEO gambled and lost. The only fair recourse is for them to forfiet an equivalent portion of their vast personal wealth to make amends. As long as there is a safety net for them, that’s all that matters. They walk away from the wreckage with millions of dollars and other perks and are set for life. Meanwhile, the avergae employee whose 401(k) has tanked is left to pick up the pieces and move on. Then again, prison is also a good alternative.

“De-regulation” is the ultimate cause. I disagree, Paul; I questioned the widsom of the repeal of the Glass Steagal act back then. We see the effects of if now.

First, I think you start your argument with a flawed assertion.

There is regulation in our “free market” already. Rule FD (full disclosure) just to name one.

Do we need more regulation(s)? Yes, especially when dealing with derivatives.

Pricing and rating derivatives is very complex. Understanding the downside risk requires some analysis that requires running computer intensive calculations like a monte carlo simulation. Even then, you have to make some assumptions that may not hold true.

So there has to be some oversight and regulation in this market.

With respect to Mortgage backed securities, there needs to be more oversight on the loan origination side. How many of the foreclosures were on conforming loans?

There are a couple of places which can cause failures. None of these individually could have caused the collapse that we’ve seen, but that when multiple points of failure occur, you get the collapse.

Major financial institutions have been behaving like athletes on steroids, they are absolutely bullet-proof until their over-inflated ego’s get them in trouble. The problem is that what their blind stupidity results in is no responsibility for the destructive effects on everyone else but themselves. Having to sell your company after you’ve “stolen” trillions and trillions of dollars doesn’t really hurt now does it?

The comments aren’t answering the question. The regards regulation. The answer is emphatically yes. Sorry, but, there is a positive side to government. It is regulating things that otherwise will grow out of control and impact us all. Read your history, we experienced the Depression as a result of a lack of regulation. George apparently thinks that is ok. for the last 30 years we have eliminated the protections established after the depression. Do they need to be updated, sure, but, they definitely need to be in place! Really can’t waith for Jan 09!

These financial entities should have their products approved before they are sold to investors and the public just like drug companies are required by the FDA. Transparency, risk and the effect on the financial systems have to be understood or we’ll continue to have credit and liquidity crisis every time some exotic product introduced by Wall Street blows up and the FED has to clean it up with taxpayer’s money.

Privatize the gains, socialize the losses. Its the game plan for every cycle. Create a mania with cheap money, pull it away and harvest the assets. Take a look: “The Creature from Jekyll Island” by G. Edward Griffin. Let them fail and you’ll see the other banks clean up very quick.

If anyone should be more regulated it should be the rating companies… they are the ones that rated these securities as “AAA” rated… they were the ones that said that they were next to Treasuries in safety.

As for the Banks and Investment Banks, at some point you have to stop protecting your children and let them fall a couple of times… that is truly the only way they will learn. We will all learn a lesson from “BearGate”.

This will happen again. Someone will come up with the next “CDO” or “SIV” and we will have the same thing all over again in 10-15 years… It is just another cycle… I just hope that the rating companies will rate the securities properly and not rate it higher so they can get the income.

Remember on Wall Street it is all about the dollar… and what people will do to take if from you.

It depends on what you mean by regulation. If you mean the prescriptive approach mess that characterizes the SEC, all that will do is add more and more pages of regulations and exemptions (see the reg NMS debacle). If you mean principles based, which characterizes the CFTC as well as the FSA, yes. If the IB’s expect a handout, strings need to be attached. Also the pay structures should be linked to long term values. The CDS and CDO jockeys walked away with a ton of cash over the past several years and no accountability for the inevitable outcome that we the public are left with.

No need of regulations. Let them fall (no bail-outs, interest rates cuts, no FED swaps) and they will learn the lesson.

Combine “moral hazard” with the attitude that “we are to big to go under” and a Federal Reserve in your hip pocket, is STRICT regulation and governance too much to ask since its taxpayer money likely to be hazarded to save their greedy asses? What else will deter them? Morality? Ethics? Remember this is Wall Street …

the fed was responsible for all the liquidity in the first place. why would you want to regulate the banks?
the unelected, unaccountable FOMC, at the very least, should be open to scrutiny by congress. secret meetings should not be allowed. M3 should be not be secret either. stop trying to control prices and focus on a stable currency instead.
ron paul is the only congress member who knows the right questions to ask on the finance committee. follow his lead.

As a taxpayer I’m sick of the Government bail-outs of big business that only got into trouble because of GREED! It’s not the government that bailing them out it’s us the taxpayers and then Washington has the unmitigated gaul to tells us NOT to expect the Government to do anything for us like help lower interest student loans. I say we can take care of ourselves just stop taking OUR TAXPAYER DOLLARS and MISSUSING then to fund GREEDY, NACISISTIC BIG OIL AND BIG BANKS!