Healing our Financial System

http://www.economist.com/node/18013965/comments#comment-814094

Herewith, my two cents on measures needed to heal our financial system.

tiger ticker wrote: Jan 27th 2011 11:27 GMT


It would be fun to set up a villain hierarchy somewhere and have people vote on it. My top villains would be:

  

(1) The human social need that impels "don't rock the boat" thinking: many people would have spoken out if they had known that the messenger would not get shot or ostracized;

  

(2) the common phenomenon that CEOs of financial companies do not know what is under their own roof; these naughty boys do not make it their business to find out because it would annoy the rainmakers; to borrow a Michael Lewisism, the BSDs and gunslingers will not submit to systems of control;

(3) capital allocation schemes in the US that stimulate risky behavior:  reckless banks get government-guaranteed deposits with insurance premia that are not at market rates, the too-big-too-fail doctrine which provides that LTCM or Goldman Sachs or Citibank or FNMA can do absolutely any risky thing with impunity;

  

(4) the harsh reality that regulators cannot keep up with the arcana invented by MIT graduates on Wall Street (eg, synthetic credit default swaps, off-balance sheet SPEs that disguise leverage, CDOs tranched out in 12-dimensional arrays, etc.) and

(5) campaign finance that permits legislators to get ridiculous amounts of money from those they regulate (Frank, Dodd, eg.)

My amateur-hour Rx:

• restore the wall (Glass Steagall) between commercial banks and investment banks;
• require FDIC-insured banks to pay deposit insurance premia that truly reflect their risk rating;
• require investment banks and auditing firms to be full recourse partnerships;
• deconsolidate (AT&T style) the banking industry;
• establish a legal limit on annual consumer debt service (debt amortized fully over 30 years) as a percent of income; and lastly,
• change all campaign financing to public taxpayer funding so that legislators will no longer be for sale.

Obesity Research

Charlotte Observer, Jan. 5, 2011
http://www.charlotteobserver.com/2011/01/05/1956356/weight-loss-ideas-that-work.html

Applause for the efforts to pay attention to early onset obesity. I cannot see the wisdom of a government-based solution, such as taxing sugary drinks. Other ideas:


1. Eliminate child abuse.

2. Give every child two involved, committed parents.

3. Promote parenting skills.

4. Associate fruits and vegetables with physical attractiveness and high energy.

5. Instead of top-down research (testing digital coaching), use the research dollars to observe behaviors of obese children and how their food choices are associated with emotional needs. Identify what percent of their consumption comes from ready-to-eat food and snacks (impulse) vs. prepared food (planned.)

6. Identify any genetic predispositions for compulsive eating, such as slow neural awareness of satiation, sugar craving, or low serotonin levels.



Given the many mental health professionals listed in the phone book, it is amazing that we cannot call obesity what it is – a symptom of emotional suffering.

$50 Billion Facebook?

http://www.economist.com/node/17853336?story_id=17853336&fsrc=nwl

Is Facebook Really Worth $50 billion?

Thank you, Economist, for emphasizing the octopi suction cups characteristic of Goldman Sachs. May I ask why a national bank is permitted to make these investments when they have depositors’ money guaranteed by the US Government’s FDIC?


When I worked on Wall Street, the whizziest of the Whiz Kids were the ones who could figure out how to circumvent regulations that prevented a desired transaction. I remember the NYSE “fully distributed” rule that was the last impediment to a “recapitalization” so in vogue then. The discussion of this problem was so amusing…. we stood around and spoke like the gods on Mt. Olympus, observing that being listed on the NYSE was overrated. Another was a “Section 521 Note Monetization” which was an invention (effective but short-lived) designed to circumvent paying capital gains taxes when divesting low-basis subsidiaries.

The point is that there is no regulator, all of whom make less than $500,000 per year, that can stay one step ahead of the parasites on Wall Street who exist to design transactions that circumvent regulations. No doubt, they are bright boys there at Goldman Sachs. No doubt, Govco cannot compete for the talent Goldman hires out of Stanford, Cal Tech, and MIT.

My thesis: the ONLY way to regulate Wall Street is to require investment banks to be private partnerships funded with the partners’ capital. Otherwise, they are on opium (OPM – other people’s money) and they have no incentive to take prudent risks, especially now that they are too big to fail.

Even if Goldman reverts to a private partnership, take note of their disproportionate influence in halls of government: Hank Paulsen, AIG bailout proceeds, slap-on-the-wrist fines, just to mention a few. Of this, you can be sure: there will be no exposé on Goldman Sachs, not from Hollywood, not from print media, not from blogs, not the SEC, and not the Federal Reserve. The Rolling Stone article and The Big Short merely scratched the surface of the real story. There is no one out there smart enough to get the story AND remain safe from the octopi suction cups. Of those powerful enough to get the story, they are in Goldman’s back pocket.

People used to worry about the military-industrial complex. At least those actors were visible to the press. The average voter has no idea of who Goldman is, and even the educated voters are easily conned by their sophistry. Goldman Sachs is more entrenched than kudzu.