ANSWERS

Ok anonymous, I take your point, but the real problem which overhangs this discussion is the Too Big To Fail question. If a regulator or a group of regulators--and it must be universal I think--tries to fix the system through rules and regs (admission: I for one feel this will certainly fail), when it breaks, as it almost certainly will, the regulator owns it. And if the great regulator in the sky says "I've fixed the problem," the market will figure out in a New York minute that the regulator will not be prepared to admit defeat when the excrement hits the revolving blade. Hubris will out...especially if someone like Larry Summers or Barney Frank is involved. TBTF in spades.

It is far simpler it seems to me to keep that bright line shining bright than to hope against hope that every regulated institution will not come tumbling down before some exogenous event (God, I HATE that word) resulting in a "you own it, now you fix it" call to regulators far and wide. I have no idea whether it is true or not but this time last year or friends at Goldman Sachs were reported to be sitting on a liquidity position of $90 billion. It disappeared practically overnight through no malfeasance on their part. Hate them if you will but they are a very well managed firm with great risk management in place. I doubt if any set of new regulations could improve upon their lot. I have a great deal of faith in our regulatory system, especially the Federal Reserve and especially the New York Fed but when a bank at 44 Wall can be tanked by the actions of the financial system of Bongo-Wongo who may not be blessed with the wisdom of Liberty Street Advisors, regulation does not seem to be the answer to this humble scribe unless we plan on talking over the financial world.

We have to put risk back in this game. We have to make sure that EVERY player greats the start of the day with the notion that it his money that is at risk and that there are no more bail-outs or free rides. Want to supply cheap funding to your wholly-owned sub? Go right ahead but if they tank, bye, bye to you too. Look, I'm old enough to realize that this isn't going to be an easy step to take but if it's too big to fail, it's too big. Oh, there's another advantage to this as well. Capital allocation and risk adjusted return becomes much simpler in clearly defined businesses which also make compensation schemes easier to administer and obviates the need for a plan as insane as the one put forward yesterday by Our Boy Ben to have the Fed wade into the morass of financial compensation. As my granddaughter would put it, "what are you thinking?!!" "DUH!!!!"

Back to you.


Paul. Indeed. But sanity is not a part of this mob's resume