Bailouts or Regulation?

by: Barry Ritholtz

Can the Fed save the (financial) world? Roger Altman, former deputy secretary of the Treasury, thinks so:

"Today, regulatory authority is divided among the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of Federal Housing Enterprise Oversight, the Securities and Exchange Commission, the Commodity Futures Trading Commission, state banking regulators and state insurance regulators. That’s too many players.

What’s more, this balkanized system supervises only half of the relevant financial universe. It neglects investment banks, hedge funds and institutions like mortgage companies that issue asset-backed securities. The assets of these unregulated entities total about $10 trillion — which is the same amount we see on the regulated side.

The unregulated institutions pose particular risks because they are highly leveraged and financed primarily through short-term money markets rather than customer deposits. And unlike big banks, many of them do not disclose their finances to the public."

If taxpayers are going to be on the hook for the bailouts, than we should be able to set the parameters of what is allowable in terms of capital minimums and leverage.

Yes, this is regulation. No, this is not a Free Market policy. But neither was the bailout of Bear Stearns, nor the Housing Bailout, nor the imminent bailout of Fannie and Freddie and maybe even FDIC.

"The Bear Stearns case vividly illustrated the dangers that come with lack of regulation and transparency. Although Bear Stearns carried $300 billion in liabilities, it was not supervised by the Fed. When it began to fail, the Fed correctly judged that the system might not withstand the shock and arranged a rescue. But suddenly, the Fed was standing behind both the larger banks it regulates and the major investment banks it does not. This cannot continue.

The next president must first create a single framework for the major financial borrowers, administered by the Federal Reserve alone. This wider regulatory umbrella should be more conservative. In particular, the minimum levels of capital and liquidity that financial institutions are required to maintain should be higher than they have been in recent years. And the institutions should put in place better and more detailed systems for reporting — internally as well as to regulators and the public — on all the risks they are taking."

Beware the false dichotomy that many pundits present when it comes to these issues. The choice isn't between regulation and no regulation -- it's between Federal Bailouts or no Federal Bailouts.

You want the bailout? You take the regulation with it. Otherwise, don't ask the Fed or Treasury or Congress for help, you disingenuous phony free market hypocrites . . .

How the Fed Can Fix the World
NYT, September 2, 2008

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