BACK TO BEN

The Chairman was up on the Hill again today facing off against Barney Frank and his band of Geniuses. Ron Paul is the latest bete noir in the morality play having proposed legislation that would enable the Congress to audit the Fed. Needless to say, Ben doesn't think this is a really good idea as the probable result would be to remove whatever shred of independence the Fed has left but as we have surmised, neither the left nor the right is really happy about the Chairman at this time or many of the policies carried out by the institution, and absent a ringing endorsement from The Leader by way of the stated intention to reappoint Ben, methinks the Chairman is in trouble. The Leader's pet projects are in a bit of trouble and I don't think for one minute that he wouldn't can Ben for a couple of badly needed votes especially if they carried the whiff of bipartisanship along with them. Half the world thinks we're a bit daft at this stage and without Bernanke, they will certainly believe that we've gone starkers. The image of Larry Summers in the Big Office would be truly scary to most of the world I think. Summers and Our Hero running monetary and fiscal policy? Terrifying.

And speaking of Our Hero, he was traipsing around the flesh pots of Europe and the Middle East dialing for dollars to fund The Leader's agenda. Back in the eighties when the emerging markets and the world's banking system was the going through the Greatest Crisis of All Time, we who nobly served on Bank "Advisory Committees"...they were called "advisory" rather than "steering" because the latter nomenclature might have given some fool the idea that the banks were really making the decisions and said fool might sue our collective asses off...used to do the same thing. We called them "road shows" and they were always (supposedly) the idea of the obligor. Of course we were there to see that said obligor didn't go off the reservation. Like Our Hero, we had a firm grasp as to the concept of who was Numero Uno. The hot trips were always to places like Brazil, Italy and anywhere else in Europe...especially Hamburgh. Had a lady colleague attacked there on trip for standing too long on a corner that was the stake-out of one of the working girls along the Rapperbahn. Great amusement for all...except for said colleague. But, we saved the world as we then knew it. Hopefully, Our Hero was as successful.

Back then, we also had the concept of "systemic risk" and back then, nobody understood any better than today what the hell that meant. Frankly, the best definition I have heard is not the comparison to the old Supreme Court definition of pornography but it being the "moment when everyone has the crap scared out of them at the same time." Why is immaterial; it's just that everybody knows that things aint good. Now that is a real situation but the leap to the identification of individual institutions as embodying systemic risk is, in my mind, a bit of a reach or to put it another way, an effort that will almost certainly result in insuring that perception will become unwanted reality. And yet, we are spending a great deal of time and effort in arguing who will be the next regulator of systemic risk and not in this country alone. The battle is being joined in the U.K and between the U.K. and the E.U. (where have we seen that movie) to what IMHO will be a meaningless and dangerous result.

Indulge me for a moment. Having been a member of a systemic institution, I think I can say without hesitation that the belief that there will always be someone there to pull you out of the mud does effect thinking and decision making. Sub-consciously perhaps, and yet in a very real way risk taking is made easier if there is the belief that the final result may not always be based on the decision one is about to make. There is no doubt that the S & L crisis came about not solely because of the increase in the amount of deposits that could be insured, but was certainly exacerbated by that event. The knowledge that the depositors were protected undoubtably resulted in individuals taking greater risk in the hope of achieving greater rewards, and those that fund these risks were unconcerned as to the use of their funds. So too with the knowledge that one's institution is 'systemic" in nature. It may be buried in the sub conscious, but it's there.

Quite frankly, I would much rather see a situation where the regulatory bodies of the major banking nations come together and announce that no institution is "too big to fail;" that there is no such thing as a "systemic risk-type of institution," and that no institution or individual should expect that they will be bailed out of their dealings with any institution simply because of the institution's size. To do otherwise and especially as is envisioned to announce that this institution or that bank is simply to big to fail and will be monitored by this regulator is to destroy all discipline--even the little that had existed--in the market place. It is often said that the stock market is influenced by two things; greed and fear. In the financial market place and in the capital markets the greatest regulator that exists is fear. We should not destroy it.

I SHOUDA STAYED IN BED

Well, all was revealed today. Somehow, I don't feel very good about it although there were few surprises. The Fed appears to have come out ok, the Office of Thrift Supervision is no more, another new, massive government agency is to be created and we are supposed to believe that capitalism has been saved from itself. The Leader continues to give good speeches although do you get the feeling that in keeping with his Green bent a lot of the language is being recycled? There wasn't much by way of detail (as usual), but it sounded good.

For the life of me, I don't know how you go about regulating individual corporations but these clowns are about to have a go. Much better that one tries to regulate products or activities but I am afraid that is not what the real agenda is all about. Despite all the rhetoric about not wanting to run this or run that that is exactly what this administration seeks to do through its actions and the financial sector appears to be the next part of the economy not to be run by The Leader and his mob.

The thin ray of hope appears to be the positioning of the Fed to look after the systemic part of the financial sector as the Fed has up to this point been a fairly independent body rather than a newly created Clown House such as that envisioned for the consumer part of the business. Now how the hell one goes about defining what is what inasmuch as a systemic player such as J.P. Morgan Chase has one hell of a big consumer business is beyond me unless one is prepared to let the Clown House oversee the consumer bank and the Fed look after the wholesale and capital markets businesses. Now will not that be fun? But scarier yet, The Leader seemed to be saying that it will be Congress who draws up the rules of governance irrespective of the identity of the regulator. Once that camel gets its nose under the tent it's all over but the shouting...or perhaps wailing and gnashing of teeth is a better image. Further, the Fed--or perhaps Mr. Bernanke--has showed less and less interest in jealously guarding the independence of the institution than some would hope. If the tea leaves are correct, in a year's time it may well be Larry Summers in that role and while he has been spending the last few weeks trying to convince every man, woman and child that The Leader's administration does not have a socialist bent, no one really believes that an independent central bank is high on his agenda. Then again, if he becomes its chairman, who knows where his ego will lead him. Either way it's not a happy picture.

Anyway, the future is certainly an industry operating under greater regulatory oversight which, if crafted by the steady hands of Messrs. Dodd and Frank, is certain to be restrictive and useless at the same time. In the mean time the lawyers and lobbyists are going to make a fortune. Throughout all this everyone has seemed to have forgotten that the business of finance is hardly the private playground of American bankers. I used to joke that you never had to be smart to be Swiss; just have the right banking regulations and you could make a lot of money. Never will this be more true than in the future of finance where the Great American Competition is directed by politicians. We stand to lose a lot sportsfans both in the private sector and in the public arena as well, as this new page will surely have an impact on the dollar and its status in the world. But of course the systemic risk will be removed....then again, weren't Fanny and Freddie systemic? And weren't their regulators Barney and Chris? Oh well...