Friday, September 19, 2008


Here's an angle I hadn't considered: Aren't you sort of glad Congress repealed Glass-Steagall?. "Without Glass-Steagall repeal, Bank of America wouldn't be able to buy Merrill Lynch, the only bit of arguably positive news to come out of this crazy weekend. And more generally, it is looking like investment banks that don't have big consumer banking franchises aren't up to the challenge of surviving modern-day financial crises."

I'm clearly no expert on the matter, not even close, but to me this just means when Merrill fails again it will bring down BoA with it. CitiCorp isn't doing so well lately.

Republicans hate regulation, but regulation can mean two things. First it regulates what you're allowed to do and that is limiting, but second it regulates your reporting and transparency, in that usage it's more like certification. As I understand it, the panic is all about this junk mortgage debt that was repackaged as high quality sounding derivatives and resold to other investment houses who didn't know what risk they were actually taking (and hey everything always goes up right?). When the bottom fell out because people couldn't pay their increasing adjustable rate mortgages or refinance because their home values dropped, the confidence dropped out of the investment houses because they didn't know what they had because what they bought from others isn't clearly defined and this made people unwilling to give new loans which caused a general credit crunch.

Here's an admittedly weak analogy. What if the FDA didn't require accurate and (well only somewhat) detailed labels on food? If there weren't accurate or even any calorie counts would you just go by the "Now Low Fat!" marketing messages? After a while and you were gaining weight would you still trust those useless labels?

Banning fois gras may be bad regulation, because it prevents you from making an even informed choice (I don't really have an opinion on it, I understand the cruelty argument). Forcing restaurants to include nutritional info on the menu seems like a good thing. Even though it forces the restaurant to spend money they probably wouldn't otherwise, it lets you make better informed decisions. It's also something the few individual places would do on their own unless everyone did it. The goal is to make the requirement not too burdensome.


Richard said...

You have nicely described the main reason why I don't have a problem with most regulation in the financial industry. The ones that add to transparency and require reporting are the most critical from an economic standpoint. It is the hidden information that seems to be causing much of the current crisis. Once people realized what they bought, boom!

Regulation to stop companies or people from doing things rubs against my stubborn laissez-faire capitalism streak (slowly being beaten out of me), but since the market "taking care of things" is extremely painful this time, obviously there is some optimum level of regulation, and we are all going to disagree with it.

Turn it all into dollars. Add up cost of regulation, cost of not regulating (like the issues now), compare to determine whether to do it. That's how engineers optimize things. Of course putting the value on some of these items is phenomenally difficult but the attempt should be made. I could be being very naive.

Howard said...

Thanks. I should have made it clearer that regulation/certification is perhaps better called oversight and that's something this administration is opposed to and recent Congress' have abdicated their responsibility for. The SEC ain't doing so well at it either.

Yes Sarbanes Oxley is a big regulation passed after Enron. But just like the Patriot Act, Congress isn't too good at getting the balance right after a big public event. I'd look at the next round of regulation very carefully.

DKB said...

It's my understanding (and I'm NOT a lawyer, much less a financial lawyer) that Glass-Steagall would merely have prevented BofA from buying and/or operating Merrill with customer capital, and from "mixing" the pools of capital. So, BofA could own an investment bank (or create its own) as long as the capital used to buy or create the investment bank were wholly owned by BofA.

In truth it might have effectively prevented them from buying Merrill because of that division, but I don't necessarily see that as a BAD thing. I put money in a bank that I can't afford to lose, and I invest money in the market that I CAN afford to lose, or at least to wait a decade or so for it to be worth something again.

Of course, I'm not a free-market absolutist either, since it's very clear that the barriers to transparency (natural ones and especially artificial ones big business loves to create) are frequently used to muddy those crystal-clear free market waters for the purpose of corporate gain. So, I never thought an unregulated financial industry would be a good thing. I get to turn a couple of degrees west of south and offer my Middle Digit of Disdain towards Crawford and say "Told ya so, W."