Jubak on the Paulson Plan

Jim and you obviously have a point if the shadow-banking system isn’t regulated as the result of this. There’s where I disagree. In talking with folks in the banking business who are subject to Fed audits and data reviews they are time-consuming, expensive, scary and onerous (not next to gullible). Once the Fed is inside the non-bank banks we’ll get regulation even if JJ think we won’t at the start. Plus the re-structuring, consolidation and re-missioning of the oversight groups will move it all that direction.
Here’s the real thing though – and my proposal – supervision of the shadow system is in all our interests. The lack of adult supervision has proven dangerous as somebody has said. But is inspection the best mechanism – why not require the non-bank banks to take out insurance and/or post performance bonds and create an incentive to do their own policing; i.e. put the market’s de-centralized information collection and coordination mechanisms to work for the new regulations rather than against them.

Somebody go and get Carter Glass out of the grave. Rubin, Paulson and all the other self-serving, money-grubbing hacks from Wall Street are utterly incapable of doing what needs to be done.

Jubak’s is the best explanation of Paulsen’s non-plan plan — and the Street’s enthusiastic, 400-point embrace of said non-plan plan — I’ve come across. But what do you expect when you let the foxes guard the henhouse?

“Anyone that says regs are onerous is not truthful.”

Agreed.

Moreover, regulations (the more sensible the better, of course) are like taxes. They’re the reflection of how much it cost to have a level-playing field in the system or the society.

Only those who want a tilted playing field in their favor opposes regulations (or taxes) for the sake of opposing them. It’s about the money and the power; philosophy is only the justification to mask this agenda.

One comment in Jubak’s video struck me as rather silly. The point about “Wall Street remaining competitive in the international markets”. My question is: must this competitiveness come at the expense of the American people? Me think transparency and strong regulations is the way to have a competitive market. After all, which investor (foreign or native) wants an opaque market where connections and inside dope matters more than anything else? Only the investors with said connections.

Well I don’t know if anybody’s still checking back but let me clarify. JJ’s point was that the regulation of non-banks had no teeth because requirements wouldn’t be imposed. When I said that regulations were onerous is was with approval on the grounds that data collection and inspection would cause a great deal of work and attention on what amounts to transparency. Perhaps a tad subtle but it gets worse. I was further arguing that this was “rock soup” since one the Fed was in and making inspections moving down the path toward fuller and more formal regulation would be walked. And for the record my own first post on “adult supervision” was at 0530 Sa. In that btw access to a dloadable PDF tracing the history and mechanisms for regulation is provided which dates from circa ’02/’03:
http://tinyurl.com/3cm5un

The subtler point was that regulatory enforcement by inspection was/is cumbersome. The reason markets are efficient is that they’re decentralized whereas inspection requires central control. If we could find a market-like mechanism that encouraged malefactors to make their decisions locally with their superior knowledge not just on their own immediate benefit but also recognizing the regulatory requirements it would be more efficient AND weigh-in with social costs/benefits more effectively. And IMHO CDS’s et.al. aren’t the same as mandating performance insurance where in effect the non-banks have to put their own capital at risk. Other alternatives might be performance bonds, a combination, etc. A 3rd thing would be to review comp programs so that aren’t asymmetric – that is upside rewards but no downside risk. The difference between the old Street partnerships and the new public companies is the the latter are playing with OPM.
We do need a new regulatory regime as the Street has proven beyond a shadow of doubt that it requires adult supervision. Now what kind of supervision ?

The key to the problem is not regulating the lending process, it is regulating the Rating Process. If S&P. Moodys and Fitch were not willing to rate the Bonds, CDOs and SIVs as investment grade, there would have been no market for them, and Sub-Prime loans would have required 18% rates.

The solution is to have ratings by disinterested parties, with a totally open rating process. There should also be a rule against “Rocket Science” financial products that cannot be understood by anyone with out a PHD in mathamatical physics. I personally suspect that Greenspan and the Rating Agencies did not want to admit that they could not understand the new instruments. Accordingly, they went along with the BS of the investmement bankers that was supported by a foot thick pile of uninteligabe print outs.