Common Sense = More Efficiency

March 31st, 2009 · No Comments · Print This Post

The sweeping changes and oversight recently proposed by the administration is the newest lightening rod of contention in the marketplace. In the “hindsight always being 20/20 department” this is more of the same from government, regardless of political party. Everyone is a genius after the cards have been played. What am I specifically referring to? Let’s look back just a little bit, back to the pre-internet bubble. Everyone, and I mean everyone, knew the market was unsustainable from a pricing and value perspective as well as from a common sense perspective. So why did it continue until the masses of people and investors had a simultaneous epiphany that the emperor had no clothes? The herd mentality can be a powerful opiate especially if coupled with the greed component. Moving on to the current crisis, the massive run up in real estate prices from 2002 until August of 2007. The majority of people NOW realize that double digit real estate appreciation year over year is not sustainable. Almost everyone who had a pulse was aware of all these new loan products such as adjustable rate mortgages (ARM’s), interest only loans, negative amortization loans, and the real “coup de gras” which was the no documentation loan, AKA “liar loans”. When people start calling them “liar loans” on Main Street you would think that some modicum of common sense would have kicked in to say, “hey this is not right.” We are again faced with the dreaded herd/mob mentality coupled with greed. Although this time it was kicked up several notches by the use of leverage aka “credit enhancements”. MADNESS!!!

Thank goodness the government is going to come to our rescue now that the house has already burned to the ground. Massive regulation is not the answer, never has been and never will be. All this does is create more bureaucracy, more paperwork and more loopholes. Please do not mistake my comments or observations as being cavalier but more of the pragmatic nature. During every financial crisis that we have faced going back to the Great Depression of 1929, regulation has been the battle cry. More, more more was the mantra and so it was piled on. In every instance since that point in time the financial engineers of Wall Street have found a way to game the system. A perfect example of that was the massive leverage utilized by Long Term Capital and Credit hedge fund. They were able, through loopholes and gaps in the system, to use multiple firms globally and leverage their trading positions an astonishing 100 times. This was followed by an all out sprint by every financial firm, be it brokerage firm, insurance company, banks, or lending institutions to create these financial instruments that could be packaged, rated and sold as various tiers of quality. The government liked the economic numbers coming out and they really did turn a blind eye to what was really occurring. If we look past the rhetoric and grandstanding into this crisis, it was systemic and really driven by politics. Who wants to be the spoiler of a great economic party? The answer is no one, so what happens is that everyone starts to believe their own BS. That is typically the beginning of the end. Hell, even with 7 years of warning on the Madoff fraud no one listened and then after the fact the finger pointing and grandstanding started. Government does not have the top tier talent to deal with the size and scope of the capital markets landscape. Talent will eventually leave for the private sector where they can make much more money. A government appointment is typically a cut in salary for many of these people.

More regulations, more policies, more oversight and more government bureaucracy are not the answer. The financial alchemists on Wall Street, the high paid accounting firms, the top tier law firms will always find a way around the system regardless of regulation. That is where common sense comes into play. If the government really wanted to do something completely outside the box they would put some of these firms on retainer to advise them on what is really going on in the capital markets system. The government can certainly afford best of breed firms to advise them on key strategic planning as well as giving them a less disconnected view of the capital markets system. The other major factor here is the inherent conflict of interest that the political contribution system currently allows. Politicians are always looking out for their constituents, which really means key supporters, further defined as big contributors. When policy is influenced in this manner the system is at risk. The results we are currently living through.

To bring this diatribe back around to the point which is more government regulation, I think that without a doubt additional transparency needs to be had when it comes to the capital markets and how derivatives are being created. I also believe that the government has so many rules and regulations already in place that piling on more may just jam the system up. The interpretations of the laws already on the books need to be better defined and more self regulating bodies need to be put in place. They need to be ones that do not kowtow to their industry constituents but ones that have real liability and severe consequences when something slips through the cracks. Sarbanes Oxley started off as a wonderful fix to the accounting system after the Enron and Worldcom scandals but the costs associated with compliance have really become almost counter productive. COMMON SENSE, rules within reason, rules that have teeth and consequences for those who veer off the path. We need increased efficiency in the regulations, not just throwing more bodies at a problem. Again in hindsight it all seems so simple but the answer is not “more”, the answer is more efficiently.The Rundown download