New York Times Comments
Jan. 25, 2009
Bring Back the R.T.C.!
Link. Ben Stein also suggests using the RTC model. The good news is that thanks to better technology developed since the early 90s, it should be relatively easy to impose the bulk of the cost of bad decisions on the corporations, managers, directors, shareholders, and debt buyers responsible for making and funding those bad decisions — and minimize the cost to taxpayers. The only ingredient that hasn’t yet appeared is the leadership necessary to write the simple business rules and get the grunt work done to adequately disclose information about the securities and the private banking instruments that are at the root of the problem.
I wrote about this at http://paulwilkinson.com/2009/01/23/time-for-a-global-resolution-electronic-applications-and-trust-great-corporation/. The old rule that if one wants to use other people’s money, one must disclose all material information about the use of the money must be applied to modern finance. Fortunately, the technology exists to disclose all the information necessary to establish market prices for troubled assets. The holders may not like those prices, but better they suffer the consequences of their decisions than innocent taxpayers.
Jan. 29, 2009
Another View: The S.E.C. Should Hire Journalists
Link. Other differences: Journalists learn to work on deadline and live in a deadline culture. Lawyers learn to bill by the hour and live in a more leisurely culture. Lawyers might fear journalists getting carried away, but journalists are also trained to be edited and appreciate good editing. Lawyers are trained to argue. Having been both (and having worked at the SEC for 3 1/2 years), I agree this idea could give taxpayers more value and investors more transparency.
April 21, 2009
Another View: Tighten Short-Selling Rules for Now
Link. Some investors like to be able to short; others detest it. What better scenario exists for a market-based solution? Is there any reason companies (shareholders, directors, or management?) couldn’t set their own rules with respect to letting shareholders lend stock in their particular company to short sellers? There’s a Wiki at http://paulwilkinson.com/wiki that’s intended to gather up some crowd sourced wisdom on this idea if anyone happens to be interested in it. This would add another factor for investors to consider before going long in a company: do the company’s particular short selling rules add to or detract from shareholder value? Isn’t that what the market is all about?
June 19, 2009
‘Too Big to Fail’ Policy Must End, F.D.I.C. Chief Says
Link. Ms. Bair is a voice of reason. Until TBTF is replaced with something like the FDIC’s time-proven method, uncertain rules will discourage transparent pricing. See “Will SEC Give Buy Side What It Needs?” and the comments at http://seekingalpha.com/a/331n. Fortunately, the FDIC and SEC have much experience with the XBRL data standard needed to make this work.
Sept. 23, 2009
A Group of One
Link. Sen. Wyden is on the right track. But think of all the jobs and income that depend on having the extra intermediary — employers — in between medical care users and medical care providers. That’s why Sen. Wyden is a lonely voice. Everyone says they want to reduce costs, but when push comes to shove, making obsolete the corporate paper pushing bureaucracies whose sustenance is the result of the unintended consequences of ancient tax law provisions is hard work.
Oct. 6, 2009
How Do We Avoid Another Crisis?
Link. Unrestrained competition was, indeed, a contributor. The most effective check on such competition is better information in the marketplace.
The crisis resulted from violations of Securities Law 101 with respect to asset backed securities — “register or find an exemption.” ABS were typically registered for a year via the posting of unstructured tough-to-compare ASCII text on EDGAR and then deregistered because they had fewer than 300 investors. That’s when the frenzy to slice and dice the now-private ABS started.
This netherworld of securities regulation was wonderful for people earning commissions for selling the opaque products, but where competition did the most harm was among buyers who felt pressured to earn larger “low risk” returns. The solution is not to destroy competition, but to enhance it via a return to basic securities law compliance — the same sort of compliance that has worked well for public company securities disclosure for 75 years.
How? Well, U.S. GAAP didn’t work very well before the FTC in 1933 and then the SEC in 1934 started requiring its rigorous use. GAAP doesn’t extend to the details of ABS for the obvious reason that it was designed for the disclosure of public company securities, not asset backed securities. Fortunately, the very technology that contributed to the Internet boom has also contributed to the development of an analog to GAAP for ABS in the form of an XML-based XBRL taxonomy. Requiring ABS disclosure in XBRL would put ABS on an even footing with public companies, which are now required to use XBRL. The taxonomy is ready. All that is needed is the political will to require its use. (By the way, several hedge funds used it to structure ABS for themselves data before the crisis, and not surprisingly did better than most in the crisis. See http://www.wired.com/techbiz/it/magazine/17-03/wp_reboot.)
Oct. 6, 2009
What’s Needed Is Uncommon Wisdom
Link. Professor Grundfest, you must be suppressing your typical optimism as a teaching tool. Didn’t FDR create the SEC as a strong independent agency with broad statutory powers to solve exactly the problem you so eloquently explain? Granted, the SEC can’t ban subsidies for real estate investment relative to business investment. But to the extent real estate interests are converted to security interests, it can at least work to level the playing field. One way to do so would be to require the sort of disclosure I described in my comment on Mr. Knee’s post. Why not rewrite Reg. AB to do so? I’m sure you could come up with a dozen more creative ways to use existing SEC authority to improve capital markets in light of the recent crisis. And you would only need three votes to do so — not 218 + 60. Granted, the SEC operates in a political and emotional environment. But things were even more political and emotional in 1934, when it launched GAAP disclosure. Ok, there might be no Joe Kennedy these days, but getting three or four or five SEC commissioners behind thoughtful rather than foolish regulatory responses is at least worth a try, don’t you think? (From Wikipedia: “One of the crucial reforms was the requirement for companies to regularly file financial statements with the SEC, which broke what some saw as an information monopoly maintained by the Morgan banking family.”) Can’t someone step forward to supply the leadership needed to help common wisdom understand the main lessons learned from 75 years of largely successful securities regulation, particularly that using large amounts of other people’s money (what is today called systemically risky behavior) should be accompanied by meaningful disclosure of all material information about how you’re using that money?
Second Comment
Link. Richard, my theory is that Prof. Grundfest is using a bit of reverse psychology to try to generate some leadership. Just for the record, the SEC didn’t loosen liquidity requirements in 2006. What you’re referring to is the voluntary program instituted in 2004 described in 2006 Congressional testimony:
…in 2004 the Commission amended its net capital rule to establish a voluntary, alternative method of computing net capital for well capitalized broker-dealers that have adopted strong risk management practices. This alternative method permits a broker-dealer to use mathematical models to calculate net capital requirements for market and derivatives-related credit risk. As a condition to that exemption, the broker-dealer’s ultimate holding company must consent to group-wide Commission supervision, thus becoming consolidated supervised entities, or CSEs. — http://www.sec.gov/news/testimony/2006/ts091406rldc.htm
See also http://www.aei.org/issue/28851, which notes that the 2004 regulation did its job of protecting brokerage customers at Bear and Lehman. Perhaps the Black Swan was that the Treasury and Fed decided the normal bankruptcy process was inadequate to provide for an orderly resolution of Bear, one of the Fed’s primary dealers. Had an FDIC-style resolution or an expedited bankruptcy process been imposed on Bear, perhaps Lehman would have reduced rather than expanded its leverage between March and September 2008, or a least there would have been better infrastructure in place to deal with Lehman. That reminds me — why isn’t some sort of super bankruptcy agency for mega financial institutions, with extra authority to claw back compensation, being considered? Not only could that expedite resolutions, but it might also create incentives for large financial firms to stay on the normal bankruptcy side of the large/mega dividing line — and if they cross the large/mega line, take on less risk. Just a thought…
Dec. 24, 2009
Banks Bundled Bad Debt, Bet Against It and Won
Link. Thanks to disclosure, the sell side and buy side both have adequate information when it comes to investment in public companies. The sell side had better information than the buy side for mortgage backed securities, other asset backed securities, and the instruments built on top of them. Had there been adequate information in the market for both parties about the underlying MBS and other ABS, much of the derivative complexity would have been unnecessary. If nothing else, this article explains continued resistance to expanding XBRL transparency from the public company market to the ABS market, where it could do a lot of good. See http://paulwilkinson.com/2009/12/10/xbrl-data-tagging-standards-advance-on-two-fronts/#econtrans
