Sunday, September 21, 2008
Wednesday, about midday, we stared into the abyss. Many of you know that the world of short bond maturities is dominated by financial issuers. None of this could be sold. The dealers had so little financing that even non-financial paper was bid at huge discounts. Two-week obligations of heretofore unquestioned credits was bid at levels that would break the buck in just about any money fund with two or three transactions. Shareholders were leaving money funds, forcing the transactions that would seal their doom.
Othes, like my old blogmate Megan, have been accurate about GLB not being the cause of this. Another notion out there is that regulation has been lax during the Bush years. This is simply untrue. Between the post-Enron documentation frenzy and the post-Patriot act money-laundering frenzy, regulators have staffed up and been empowered over the last years in ways I have never seen in my 20 year career. In fact, in ways my colleagues with 40-50 years in the industry have never seen. Compliance departments have staffed up to 3 or 4 times their prior levels to deal with the added regulatory inquiries, requirements and monitoring programs.
One regulator has decided they need staff permanently on-site in my shop. They've never given a good reason for this, other than perhaps our offices are much nicer than theirs, and they can bill us for inventing new databases and reports that we have to create as they take advantage of our digs.
No, there has been no shortage of regulation, just a shortage of regulation that has to do with systemic safety and solvency. Regulators have been obsessed with e-mail retention, policies, procedures, desk manuals, 'know-your-customer' files, control self-assessments, speed of audit follow-up, even encouraging staffing up for 'regulatory risk'!. Most of the regulatory focus has been on matters clearly designed to support private litigation, such as retention of documents and correspondence, and policy description and attestations (like Sarbanes-Oxley).
Meanwhile, not one of them noticed that Tier 1 Capital had become a bankrupt concept, or that structure substitutes for leverage.
We have been force fed a super-sized trucker meal of stupid paper-pushing requirements while the basic risks of asset leverage went unaddressed. Frankly it was symptomatic of the Lawyering-down going on in this the country, where process and paper trail takes precedence over substance and ethics. If you think this idiocy is somehow the product of only one party, I politely submit your partisanship has severely clouded your judgment.
One final thought: This is about much more than mortgages. Seems the Treasury realized that when they amended their proposal.
I hope this week is better than last, but I'm not sure the Paulson Plan is going to get us all the way there as formed.
A wonderful post that should be widely read.
The elevation of process over judgment -- the great legacy of Bush era regulation, which was thrust upon him by the "controls" scandals early in his administration -- is doing great damage to American business in several ways.
First, it often misses the forest for the trees. That would be your point.
Second, it empowers the process experts within any organization. Lawyers, accountants, and regulatory experts have acquired great influence. That has meant that risk management has become highly specialized: "Do you have a policy, and did you follow it?" is the main question, because it is the one that lawyers and accountants are trained to ask.
Third, "process" is the opiate of the regulators. People have come to believe that if there is a process and it is being followed and there are documents to prove it, all must be well.
A careful reading of the regulatory developments of the last eight years would reveal that the Bush era has been the most regulatory since Nixon. There is no question about that in my mind.
I believe you when you say that the post Enron scandal created more bureaucracy and paperwork at the Federal level.
But look who is still in charge at the Federal Level.
Brown was in charge of FEMA.
Gonzales was the Attorney General.
Don't even get me started on the Department of the Interior and the Mineral Management Service. And I’m only naming three. The corruption is everywhere.
And you’re going to tell me that - somehow - they found the moral fortitude to crack the whip on Wall Street?
Simply creating a bureaucracy does not mean they are going to do anything and I don't believe they have and I believe with every bit of my being that this is why we are here: Lack of accountability.
Your counterpoint, please.
You are right to identify that the regulation has been poorly pitched. If the type of regulation under which American organisations operate serve only to increase complexity as opposed to temper and fashion the economy, then it's a waste of regulation.
(In this case, it makes me cringe you use the word 'empowered' in relation to this, but I completely see what you mean.)
Still, I feel regulation has been lax under the Bush administration - clearly in its over-legalistic pitch rather than in its power. By definition, surely lax regulation is the cause when things go wrong?