Friday, October 26, 2012

"THAT BASEL III THINGY..." Sarah Palin might have said.  Before going any further, you have to understand that regulators love hard and fast measurable rules.  Follow them, you are a good guy, come up short, well, sorry for you old boy but...Of course these rules do very little to make the system any safer but they certainly do make the regulator's life a lot easier.  The application of objective standards to what is a totally subjective business and expect the mere presence of the same to insure the orderly running of the system has always seemed to me to be straight out of Alice in Wonderland but what do I know.

Anyway, we have Basel III formulated primarily by folks who dread looking forward and therefore work arduously at solving yesterday's problems.  There appears to be the view in Europe and other parts of the globe that all the latest difficulties facing the financial world were caused by real estate.  Probably true.  Therefore let's make sure that we protect ourselves from real estate lending by requiring more capital to be placed against a real estate portfolio.  Probably dumb but it sure looks good to the great unwashed out there who don't have a clue as to what is going on.  The fact that the next crisis (and there will be one)  will undoubtedly have nothing to do with real estate is lost upon a group who desperately need an objective, measurable standard to which they can point and proclaim success in allowing us all to sleep better at night.  And so, in one way or another, emerges the number of 7% of primary capital (common equity for the most part) which of course, in an environment such as 2008, by any objective measurement would be gone in about 30 seconds.

What really has been accomplished is a God-awful fight between interest groups over here where bank real estate and particularly home mortgage lending is popular and the Euros where such activity isn't.  Needless to say, before there is even a hint of adoption, millions are being spent on how to change the proposed rules or avoid them in the event of passage.  Where unanimity is demanded, conflict reigns, and an advance of dubious value at best becomes a lighting rod for unbridled (and brazen) self-interest.  If adopted, would home mortgage lending disappear in the United States.  No, but the cost of such lending would certainly rise.  Are we any safer as consumers?  No but we will be poorer.  But maybe we will sleep better at night.

Basel III is more than this but I give you just on example of what regulation designed to fulfill political not economic requirements produces.  So too the stance of U.S. regulators on the trading of derivatives.  Many voices, including that of your humble scribe have warned that we risk driving this business away from where it can be monitored to venues where we have no control at all.  Sure enough, that is exactly what happened with the announcement by a number of institutions, to include DBS of Singapore--a BIG player--that they will not register to trade with any U.S. firm.  Bye, bye business for our side and bye, bye oversight.  And what have we accomplished?  It is still out there but now we know less about the risk than before.

Look, my position is not that we should abandon all regulation but that we should demand responsible and meaningful regulation, and while we are at it I do wish that we would spend more time on the people and the morays (or morality) of this business for as I am fond of saying it always comes back to the people.  I've moralized enough for one day but I'll be ready for a bit more on this topic next week.  In between, there is a great weekend of college football coming up.  Maybe those kids on the fields can show us all how the game--any game--should be played.

Have a great weekend.

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