Thursday, December 17, 2009

That Giant Sucking Sound ...

is New York City inhaling another finance blogger. That's right, first it was Mike over at Rortybomb, and now I've got a semi-full U-Haul truck parked in the frigid cold, waiting for the trip tomorrow morning. All day I've been playing that moving game of Tetris, slotting in boxes, furniture and odds and ends (guitars, keyboard, studio photography light poles) in available spaces in a cavernous truck.

For my readership of 10 to 15 -- you know who you are -- my blogging may be a bit less frequent after I start this new job. It's not that I lack ideas; the rub is simply that blogs suck up time. Maybe I'll try blogging shorter (a la Greg Mankiw, who sometimes just links to stuff he finds interesting, with no comment). I dunno; that's not really my style. But ...

I really, really wanted to do a long entry this week on the maddening futility of regulating banks using capital ratios. The problem is that Basel-type thinking (capital weightings for certain classes of assets) is just so, I don't know, 19th century. Modern financiers will always be a step ahead, using new products to innovate around the rules, so that you have to wonder, "Is this just a failed approach?"

But what in its place? Do we just let banks gamble recklessly, with even less supervision? That seems foolish since the fact that regulators were asleep at the switch during this financial crisis was a huge problem.

I think there may be a better way. I would consider ditching capital ratio requirements altogether (radical idea), but in return, make it easier to prosecute and strip of their wealth Wall Street CEOs and traders who end up running an institution into the ground. What if there were no capital requirements, but someone said, "You bankrupt this company through reckless behavior or negligent oversight and we'll take every penny you have, possibly throw you in jail, cut off your pinky and thumb (okay, I'm exaggerating to make the point), and ensure you never work in the finance industry ever again."

How high do you think the capital ratios would be in that scenario? Say 15, 20 percent, as opposed to the current 8 percent minimum today? Hard to say, but when there are aggressive clawbacks and serious prosecutions, I'm not sure you need a lot of rules about needing this much capital for this kind of asset and this much for the other. What we have now unfortunately is a broken system -- a dense framework of rules that encourages the banks to go diving for loopholes, following the advice of a platoon of securities lawyers.