April 26, 2010

Washington and Wall Street are grappling over proposed legislation to further regulate financial firms. The financial crisis was a near-death experience for many firms (hello Merrill Lynch) and actual death for Lehman, Bear Stearns, and WaMu to name a few. Still in comas from which they may not emerge intact are Fannie Mae, Freddie Mac, and bailout poster child: AIG. Many of our presumed brightest financial minds worked at these firms, and most have not gone into a different line of work. Faced with the fact that the same crowd that helped to blow up our economy and send it into recession is still on the job, how should we regulate?

My view is that if there is to be more regulation it should focus on two areas:

  1. Transparency. Trade derivatives such as credit default swaps on securities exchanges where their prices and volumes will be visible. This will require some standardization and some firms may not like it. Too bad. You guys nearly wrecked the place; we don't want that to happen again.
  2. Reserve Requirements. Lack of adequate reserves for an out-of-control subsidiary is what sunk AIG. They and many other firms were essentially placing bets on the bond market. It ought to be a requirement that if you want to treat the markets like a casino, you must have the cash on hand to make good your losses. No more buying chips on credit without the cash to pay your tab.

I am not fan of regulation or bureaucracy, and we will get more of both with the bills now in Congress. Let's hope that we strengthen our financial markets, not simply pile on more rules.

GTC

 

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).