A MODEST PROPOSAL

Now that we have established that regulations are really not the answer--at least to my satisfaction--what is it that we can do to lay the groundwork for a more stable system? To begin I think we have to agree on one basic point which is that the only institutions that count are those which are truly systemic in nature...that is those which could truly bring down the system. Another thing we must realize is that the true risk a few years back was liquidity not capital and in most financial crises in history that has been the salient fact. Oh, I know that Dodd/Frank has, despite its intentions, created even more systemic risk by the manner in which oversight is being applied and, insatiable as ever, the regulators are attempting to add to that list through the inclusion of hedge funds and alike, but in the end it is the banks and the investment houses that count and we must first deal with them.

The Euros provide a guide as to where we must start. The PIGS are a liquidity problem and they are being delt with through liquidity facilities--messy ones to be sure--but so far they have worked. Whether this is the final solution--apologies Ms. Merkel--or not remains to be seen. You know my views. But what is badly needed is a global liquidity plan which avoids the argumentative issues as to which central bank in which country covers the subsidiary or branch of a bank operating cross borders which was a continuing brawl under Basel II. The world has grown too quickly and with too much complexity for such debates when crises are upon us. Central Banks must agree to a global, permanent liquidity facility in order to prevent the seizing up of the global payments system as occured in 2008. Institutions must be aware that there will be the satisfaction of obligations at the end of the day free from over-arching political considerations on the part of a number of people who haven't a clue as to the nature of the problem or how to deal with it. Ad Hoc rescues of financial institutions simply will not work any more. Where to house such a facility? I haven't a clue but it must be independent to the extent it can be from political interference. That's a mouth-full I know, but there is no other way. Problems: The biggest pot of money in the world today is China, but EVERYTHING in China is political including its central bank. How to deal with it? As some politician said a way back, "That's above my pay grade" (turned out a lot of things were), but someone must make it work.

I've lived too long to believe that a facility like this will not be needed at some future date, but along with it we must devise methods by which we can limit and avoid the worst of the abuses and mistakes that have plauged us throughout our financial history. If at some point an institution or institutions need to access this facility the prerequisite should be a simple one; the management of the institution and it's 10 highest remunerated employees shall be immediately removed, forfeiting all compensation whether vested or not. No appeal. Harsh, you say? Indeed. But, you say, wouldn't that lead to immediate vesting and immediate pay-outs? If it were allowed but of course it wouldn't be as is the case with Dodd/Frank. Trust me. If a plan such as this were in place there would be a hightened (deliberate understatement) oversight of risk management on the part of senior management and business unit management. Somebody dies and everybody pays attention. Selective executions could also occur. Any institution that could not survive as a result of these dismissals shouldn't exist as the size of such an institution subject to these rules demands that it train and have in place layers of individuals ready to assume a management role.

We must also realize that there is a responsibility on the oversight level to insure that such depth of management exists. The management at our largest institutions is generally inbred. Throughout the industry we do a lousy job of training and retraining personnel except in highly select skill sets with little thought as to broad based, external career education set aside from the corporate culture. Oh yes, there are indeed scores of university-based advanced career opportunities. Some are better than others but for the most part they all teach the same thing, with the same biases using the "thrill of the moment" curricula. One year "asset management" is the most important thing in running a bank. The next, it's "liability management." I oversimplify but you get the picture. Further, regulators have the responsibility, as well in my opinion, the right to have if not only a say but the ability to express and opine on the future management of those institutions whose size could pose a risk to the system.

There is nothing wrong with a continuing education program but part of that program should be mandatory for previously identified future candidates for senior management positions. We have set up all sorts of industry sponsored organizations around the country and the globe which, for the most part amount to little more than lobbying sites...and have spent a great deal of money in so doing. What we need, as I have suggested, is an institution akin to the training sites the military has for up-and-coming officers where they can learn not only new theory but from the mistakes of the past. The "cadre" should consist not only of academics but former practicioners and most importantly, senior regulators, both current and retired, whose job it would be not only to train but evaluate those candidates for future management. I would require that in selective management and oversight positions, all candidates would have to be graduates of this school. There is an immense grouping of talent and knowledge in our retired work force that could be put to productive use in an organization such as this as well as current practicioners who could be suborned for a period of time. Suppose we called it Financial Management Staff College ("FMSC").

I come back to another thought that I have had for a while. Very often, institutions act in ways they ordinarily would not simply because a senior manager is in favor--for whatever reason--of "doing the deal." If senior enough, the career decision to oppose is a difficult one. Remember the $80,000,000 loan to Mexico? It was actually part of an $800,000,000 syndicate. We didn't participate because me and my really smart friend, Larry, opposed it in the face of VERY senior personnages. It was the best no deal I ever did but at the time it was not a career winner. But what had there been an independent voice in the room who, in the long term, was not beholding to the management? Suppose there was what we called in the old days and about which I have written the "Bank of England Man," placed in the institution by the regulator not as a spy but to insure to the extent possible, "Best Practices?" Suppose he, she or them were retired risk people from another institution who had probably seen it all, placed in the institution by the FMSC? Save the world? Maybe, maybe not. It couldn't hurt. Right now, I'm off to see the film, "Inside Job" playing at the U. It's about a few old friends in 2008. In the mean time, what do you think, Carter?