BACK TO THE FUTURE

Anybody know where Al Gore and the Girlfriend are? If you do, send them to the Fly Over Zone so they can experience global warming. Wind chill was -15 last night.

The New York Times was on a roll today. Krugman almost got it right but then again anything above egregiously stupid is a real plus these days. In addition, he didn't blame Sarah Palin or Rush whats-his-name for the latest spate of killings in the Middle East. Bush is responsible.

Anyway, top left business section was a really very good story on the implementation of the "Volker Plan,"--or the non-implementation is that suits you. It's going to be hard from a definitional standpoint and from a pure regulatory oversight aspect due to the afor-mentioned definitional issues as well as the sheer amount of manpower it will take to do the job. If anything the story understates the problem; it's going to be a nightmare. The conclusion reached is that the affected institutions will probably, at least at the start, engage in self-regulation which, depending on your outlook is
1. How it should occur, or
2. How we got into trouble in the first place.
One thing on which all can agree, however, is that the P & L of the covered institutions will suffer with the big trading houses like Goldman and Morgan suffering the most in the coming years.

I've never been much for worring about comparitive earnings at banks because that is a subject of value really only to investors. Earnings can tell you the state of a bank's good standing to a degree but take out the volatility of trading accounts, given moderate leverage it's pretty hard to lose money unless you have really lousy lenders or really lousy interest risk management. Conversely, if a bank is losing money, look out. The business becomes a lot easier.

Remarkably, the reason that the seperation of investment banking from commercial banking was lifted in 1989 (by the Clinton administration by the way and supported at the time by Mr. Volker) was a fairly simple and straightforward one: American financial institution were about to get their lunch handed to them by what was then known as the Universal banks--the UBSs and DeutscheBanks of the world and No-Bod-EE wanted that to happen including...if the truth be told...the regulatory authorities over here. The use of the world's reserve currency was falling more and more into the hands of institutions, both private and regulatory, over which we had increasing less control. Competition ruled the day followed closely by control. It seemed like a good idea at the time.

As it turned out, the problem was not the lack of regulatory authority as the clueless minions on Capitol Hill and in the media will tell you, but the lack of the exercise of that authority by those charged with that role. We can argue forever why that occured but the dog's breakfast that is Dodd/Frank was not, is not and will never be the solution or the magic bullet that will stop a reapeat of the events of the last decade. The regulatory authorities of the world will not be governed by Dodd/Frank and so, what we have managed to do in one swell foop is return to the glorious days of 1988, except the players will not be the same going forward. They will certainly be joined by the Universal Banks of China armed not only with access to the capital markets of the U.S. and dollars, but the capital markets of Asia and the emerging RMB. Lunch anyone? Two from column A, one from column B. How smart we are.

Of perhaps more interest was the lead story in the Times today dealing with the growing concern in Congress as to the looming Muni default scenario. According the The Paper of Record, Congress is seriously looking into methods by which the bankruptcy laws could be applied to municipalities and states. It is a story I wish had never been written, because as I intimated a few weeks ago once the press gets it's teeth into a situation like this it can rapidly become a self-fullfilling prophecy. Quoting members on and off the record as well as experts in the field, it was a well-written piece. Of course, what these jerks on the Hill don't understand is that the problem they are trying to resolve is not one in which all of a sudden, say, Illinois wakes up one morning and decides to default. That's not the way it happens. What happens is Illinois wakes up one morning, tries to refinance a portion of it's debt and discovers there's no bid and THAT happens because the market has been spooked by the front page stories in the New York Times quoting people who aren't smart enough to keep their mouths shut. They are called politicians. We've seen this movie before; it has a lousy ending.

Back to the future. See you next week.