Did Regulation Cause the Financial Crisis?

(Cross posted at The Atlantic Business Channel.)

The role regulators played in the current financial crisis is a critical question as the Treasury Department gets set to take on bank regulation in the next few months. But standing in the way of the administration’s reforms is a counter-intuitive argument that over-regulation, rather than under-regulation, caused the crisis. Specifically, this argument pinpoints blame on an 2001 banking regulation rule, which critics blame for loading the banks with toxic mortgage-backed securities.

Will Ambrosini wants to know if this argument presented at Causes of the Crisis is true:

Had bankers been looking for the safety connoted by triple-A ratings, they could have bought Treasurys, which were even safer. If they were looking for yield, they could have bought double-A or lower-rated bonds. And why mortgage-backed bonds? The answer seems to be an obscure rule enacted by the Fed, the FDIC, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision in 2001: the Recourse Rule, an amendment to the Basel I accord that governed banks’ capital minima.

Under the Recourse Rule, an AA- or AAA-rated asset-backed security, such as a mortgage-backed bond, received a 20-percent risk weight, compared to a zero risk weight for cash and a 50-percent risk weight for an individual (unsecuritized) mortgage. This meant that commercial banks could issue mortgages–regardless of how sound the borrowers were–sell them to investment banks to be securitized, and buy them back as part of a mortgage-backed security, in the process freeing up 60 percent of the capital they would have had to hold against individual mortgages. Capital held by a bank is capital not lent out at interest; by reducing their capital holdings, banks could increase their profitability.

To be sure, banks that bought mortgage-backed securities to reduce their capital cushions were, indeed, knowingly increasing their vulnerability if the investments turned out badly. But absent the Recourse Rule, there is no reason that banks seeking a safe way to increase their profitability would have converged on asset-backed securities (rather than Treasurys or triple-A corporate bonds)

So that last paragraph is wrong – asset-backed securities, specifically mortgage ones, offered a higher return than Treasury bonds, and thus it is not true that there was “no reason” someone would buy an asset-backed security absent the recourse rule. That’s why you see pension funds and school boards and all kinds of institutional investors who don’t fall under Basel regulation buying them – it’s not simply a matter of capital number recording. When you consider they were rated at the same level, it’s a sufficient reason for the pile-on in securitized bonds.

But it’s a very valid argument. Arnold Kling also believes that this “Recourse Rule” was the culprit, instead of deregulation, in getting banks to be so dependent on the credit agencies.

How the Rule Works

Let’s back up. What did the regulation in question involve? Here is the notice, along with the Federal Register (here FR), explaining the rule’s effect on capital reserving. By reserving, we mean holding capital in case there are losses on the portfolio. Banks want to keep low reserves for more profits. Regulators want to keep high reserves for more stability. For our concerns, the big difference in Basel, as opposed to previous bank regulations, is that it divides the capital reserving by asset class, with each asset class getting a “risk ratio.” Some assets you didn’t need to reserve anything against (short term OECD government debt has a 0% risk ratio) and some you have to reserve more against (mortgages have a 50% risk ratio).

Now what did this new rule do? Let’s assume you had a pool of 100 mortgages, and they’d all sit on your book at 50%. Now using a quick metaphor of “slicing-and-dicing” mortgages into security pools. If you got the first few mortgages payments in that pool it becomes less risky. Since it is less risky, it should have less risk attached to it under regulation rules. So for these first payers — or highest tranches, or AAA or AA rated instruments — you only had to set the risk target at 20%. But it isn’t all free money. Looking at the FR regulatory document (footnote 23), if the tranche is rated A, then it is 50%. And if it is BBB, it’s 100%; BB, 200%. So for some pieces of that 50% original pool of mortgages, some slices of it are more risky, some slices of it are less risky. The riskier parts of the mortgage pools had much higher capital reserves than the original.

In other words bonds consisting of mortgages are treated, for bookkeeping purposes, more like actual bonds instead of mortgages. It’s hard to argue that the asset-backed securities market was created in 2002 as a result of this amendment since it had been around for decades. Kling is correct that this gives the ratings agencies a lot more control over the value of these loans, and figuring out what to do about the way the ratings agencies got the value of these loan pools entirely wrong is a really important question. The Atlantic‘s Daniel Indiviglio has written extensively on this question.

Demonizing Deregulation

So let’s look at this new amendment more critically. It takes an older, blunter government rule (all mortgages at 50% risk), and makes it more market friendly (mortgages at the level where the market prices risk). It outsources risk-management to private companies, the ratings-agencies, assuming that companies willing to pay to get ratings on their mortgage bonds would lead to more efficient information than government regulators. It takes as granted that financial innovation has “worked” and that government regulation should act to help move the latest financial innovations more coherently into the regulatory regime.

With this in mind, it’s hard not to plug this amendment into the familiar narrative of “deregulation” that has taken place since the Carter administration. This deregulation narrative includes, in my opinion, some big success stories (telecoms, airlines), some positive but more mixed stories (de-unionization, NAFTA, de-industralization), and a disaster in the case of finance. One can spend a long time talking about these stories – but from my point of view there’s nothing about this amendment, and the political economy about how to measure financial risks, that doesn’t fit into this narrative.

The idea that we are trusting financial markets to handle this themselves, because markets will know as well if not better than regulators what risks people are taking on, is written into the very fabric of this regulation. Look again at the FR document:

The [regulatory] agencies expect that banking organizations will identify, measure, monitor and control the risks of their securitization activities (including synthetic securitizations using credit derivatives)...Banking organizations should be able to measure and manage their risk exposure from risk positions in the securitizations, either retained or acquired, and should be able to assess the credit quality of any retained residual portfolio…Banking organizations with significant securitization activities, no matter what the size of their on-balance sheet assets, are expected to have more advanced and formal approaches to manage the risks.

It is telling banks to handle this themselves, because the “science” of risk management is well provided within private financial services, and it is better for it to be handled this way rather than with the crude tools public regulators used. And I think that this narrative, that new changes to banking regulations were more friendly to the financial community in the general move to deregulation, is a real challenge for those who think that markets would have been able to do better without any regulation – what stopped them this time around?

Regulation and Capital Requirements

Let’s try a final thought-experiment. The Basel accords established a capital floor underneath which regulators wouldn’t allow banks to go. Why are they to blame for banks taking on too much risk? As a crude example, let’s say regulators required banks to hold 8% of capital, but that was too low and banks should have held 16% of capital. If banks would have naturally held 16% without regulators because markets work here, why wouldn’t they hold 16% with regulators requiring a floor? I can understand how arguments that banks are holding too much capital, and stifling growth and keeping credit artificially low, could follow, but that doesn’t seem relevant for this crisis. There’s no reason board members, shareholders, CEOs with “skin in the game” and reputation concerns couldn’t have made their companies hold 16%.

I understand the moral hazard argument, and though it obviously applies to government-sponsored entities like Fannie Mae and Freddie Mac, I think it needs to be proven rather than assumed that it applies to the banking sector. I’m willing to be convinced, but I think that’s a serious question for people who think that regulation caused the crisis. Would no regulation really have been any better?

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25 Responses to Did Regulation Cause the Financial Crisis?

  1. Chris says:

    Had bankers been looking for the safety connoted by triple-A ratings, they could have bought Treasurys, which were even safer. If they were looking for yield, they could have bought double-A or lower-rated bonds.

    Does Ambrosini really miss the point that yield and risk are ordinarily correlated? Low-risk Treasuries have low yield, and low-rated (high-yield) bonds have high risk. What they wanted was the yield *without* the risk. Risk-free yield is a free lunch and that’s exactly what MBSs offered. (Several people smelled a rat for exactly this reason.)

    It also seems to me that this rule is better described as a regulatory loophole than as a regulation. Of course loopholes are part of the text of the regulations, but to use the harmful consequences of exploitation of a loophole as an argument *against* closing the loophole is just perverse.

    As for moral hazard, there’s a lot more that could be said on that subject, but I think it’s clear in retrospect that the interests of shareholders were not served, and while the precise reason why may be disputable, the idea that shareholders can best protect their own interests has to be judged against the reality of their complete failure to actually do so.

    • Arthur_500 says:

      Moral hazard is the overarching title but one has to question if the interests of shareholders were not served. Shareholders have an interest in investments akin to the attention span of an ADD child. Give me an increase in the stock price today and damn tomorrow because i will cash in and sell your stock.

      Look at the first six months 2009 of bank reports for our largest banks. Those banks who gambled showed increased profits. Those banks who knew the whole world was looking and played it safe showed little or negative profits. The obvious conclusion is to gamble to please your shareholders.

      We walk a fine line between meeting the letter of the law and exploiting every advantage for our company. We tell the IRS we are just barely making it by organizing our company in certain manners and at the same time, with the same figures tell our shareholders that we are rolling in dough and the sky is sunny on the other side of the hill. We aren’t lying to either party but fulfilling the regulations to the nth degree.

      I remember presenting a paper in the late 90′s about the historical level of our Stock Market and compared it to the present levels as relected in the dot.bomb era. At the end of my presentation those present wanted my prediction of where the stock market was going! Did they not listen? The market was higher than it “should” be and a correction was inevitable. However, if you didn’t try to cash in on those 25% returns you would have lost your job to some wonder dude who made these high return investments and hoped to jump off the roller coaster before it crashed.

  2. Andy says:

    This is another great post, thank you. I think your penultimate paragraph (the thought experiment) is one that deserves more prominence. It’s a simple, yet powerful, argument: Regulators required at least Y when firms should have been holding X (based on some optimal risk/reward tradeoff). If X>Y, how could the regulations have caused this?

    It’s like a minimum wage set well below the market wage.

    I suppose that you could make a behavioral argument that the regulators established a mental anchor of Y, which caused firms to reassess (downward) their perception of an appropriate capital base. But I doubt that people who are arguing that regulation was a cause would want to go down the path of behavioral economics.

  3. John Thacker says:

    It also seems to me that this rule is better described as a regulatory loophole than as a regulation. Of course loopholes are part of the text of the regulations, but to use the harmful consequences of exploitation of a loophole as an argument *against* closing the loophole is just perverse.

    All regulations have loopholes. Pretending that regulation will be perfect regulation is like pretending that the free market will act perfectly. Comparing the imperfect free market to idealized regulation is also silly.

    In the absence of regulation, bubbles and panics happen every so often. In the presence of regulation, bubbles and panics happen every so often, when companies figure out the way to skirt the rules and find loopholes. But it *always* happens; there is no perfect regulation in finance. The rules adopted in Basel were designed to fight the last war, as they always are.

    That’s why Professor Kling argues for shaking up regulations every so often once the new loopholes are figured out.

  4. This is Jeffrey Friedman, author of the blog on “Causes of the Crisis” that is being dissected here–and thank you for that.

    One thing: In the quoted selection from my article above, the last line includes the option of AAA corporates. Did they yield less than AAA MBS? (Not a rhetorical question: I am here to learn.) And if they did, then, absent the Recourse Rule, why wouldn’t a bank seeking safety plus return simply bought a mix of Treasurys and AA corporates, or A corporates, etc.?

    In short, is it really plausible that AAA MBS would have been *the single most attractive investment for banks* if not for the capital relief that they offered?

    Now as to the language of the FR document, sure, the regulators thought that banks could handle risk assessment–of AA or AAA MBS! But if it were really “deregulation” then the regulators would not have tied capital requirements to risk levels that they (the regulators) determined. It would have been just a straight 8 percent capital requirement, and let the banks decide if that should be in Treasurys, corporates, commercial loans, whatever. Under the Recourse Rule, though, a bank had to hold 0 capital against Treasurys, 20 pct against AA or AAA ABS (including MBS) or GSE-issued assets (including Fannie & Freddie assets), 50 pct against whole mortgages, 100 percent against commercial mortgages.

    So when we find banks piling into AAA ABS, is this really how a “deregulated” market would work?

    Jeffrey Friedman
    Editor, Critical Review
    http://www.criticalreview.com

  5. P.S. Sorry, in my haste I gave risk weights. Multiply the risk weights by 8 percent–or, to make it easier and more relevant, the 10 percent capital requirement of “well capitalized” banks under U.S. law–and you get 0 capital against Treasurys, 2% against AA or AAA MBS, 5% against mortgages, 10% against commercial LOANS.

  6. P.P.S. to John Thacker: With all due respect, you’re missing the point. The Recourse Rule made banks seeking capital relief artificially herd to MBS, exposing them to the housing bubble. It did this by making MBS artificially profitable relative to other possible uses of capital.

    If the prohibition of liquor was not enforced with only 90% success and as a result of this “loophole,” the cost of a drink went so high that gangsters started killing each other for the right to control the supply of liquor, would you defend prohibition on the grounds that it’s the loophole that’s causing the problem? Or would you acknowledge that there would be no problem without the artificial profitability of liquor caused by prohibition?

    • I would acknowledge that the men who murdered to profit on liquor sales during prohibition should be held accountable for their actions….

      I also believe men who earn and lose a billion dollars in stock options have claimed ownership to the decisions they made when running their company, and thus also should be held accountable for their actions.

      (Careful when comparing banksters to gangsters…)

  7. Sorry again. If prohibition of liquor WAS enforced with only 90% success…

  8. ptg says:

    Re: Friedman 10:57

    But this is the whole problem: Why would any bank that wants to stay solvent ever “seek capital relief”? Capital is the buffer that protects banks (and all other firms) from bankruptcy. The real mystery here is why any bank would want to hold only the regulatory minimum in capital.

    Jamie Dimon knew — like Chuck Prince — that when the music stopped there would be liquidity problems. Given this rather obvious situation, Dimon built a “fortress balance sheet”. What on earth were all the other bankers up to?

  9. They had different estimates of the risk. Only in retrospect does it seem clear that Dimon was right; at the time, everyone else seemed to have the best risk estimate, and Dimon seemed too conservative. (See Gillian Tett’s “Fool’s Gold.”) That’s the good thing about capitalism, and arguably the only good thing about it: it spreads society’s bets among equally fallible human beings instead of putting all its eggs into one risk estimate.

    But the immediate point is that the different estimates of risk, leading some banks to want a lower capital reserve than others, WOULD NOT HAVE LED THE FORMER BANKS TO BUY MBS to lower their capital reserves if the Recourse Rule had not rendered MBS capital-light RELATIVE to the other possible uses of a bank’s capital.

    In short, Prince might have been right–if he would have just been able to lower Citi’s capital cushion by buying AAA corporates, there’d have been no problem. But AAA corporates required 5% capital, as vs. 2% for AAA MBS. So that was, to him, the obvious way to go. The problem was NOT low capital. The problem was the means by which banks seeking low capital got it under the Recourse Rule.

  10. Mike says:

    Jeffrey, let’s grant your point for a second. Why would anyone who doesn’t fall under Basel regulations buy a MBS then? Pension funds, school boards, etc. all had significant MBS exposures, and none of them were reserving capital in according with risk-weighting type stuff. I think that’s sufficient to handle this rule being the major factor for the market.

    Practically, if an investor is buying a bond, he should capitalize at bond rates, so I don’t find this rule change that big of a deal. It doesn’t make it capital-light relative to mortgages but makes it capital-comparable to bonds. That said, was the market selling MBS on this feature? I didn’t see it at the time, though I’m totally willing to have my mind changed.

    A quick google search doesn’t find much. This pops up, an advisory group for CFO’s of credit unions on why to buy MBS in 11/2004, so after the rule went into effect. I believe credit unions fall under Basel (or could, or volunteer to, please correct that if wrong).
    http://www.cunacfocouncil.org/news/90.html

    Top reasons:
    Large, liquid, high quality asset class….
    - Yield spreads…”5-year AAA CMBS yield approximately 80 bp over treasuries”….
    - Increased portfolio diversification…
    - Strong prepayment protection…

    Amusing that the liquidity was a selling point.

    I believe those three were the main selling points throughout the past decade, with capital reserving differentials being a second-order effect (which it is) on the ultimate yield.

  11. ptg says:

    I didn’t realize that corporates of any rating carried a 100% risk weighting — which is definitely silly and still a little hard for me to believe. Thanks for the info.

    On the other hand this is just wrong: “The problem was NOT low capital.”

    You can argue that the problem was low capital AND regulatory malfunction. But it makes no sense to argue that any bank that made the outrageously bad decision to enter this crisis with minimal levels of capital has any right to exist.

  12. Seth says:

    The general pattern of the ‘regulation caused the crisis’ arguments is something like:

    1. Regulators gave considered permission to lax behavior
    2. Private actors exploited this permission to get themselves into trouble
    3. ergo, regulation is at fault

    The shell game is to ignore:

    0. Private actors lobby regulators for permission to misbehave.

    This creates a superficial impression that ‘the cops made us do it’.

    The real problem is that the cops were corrupted. That’s a common problem, but the alternative isn’t to fire all the cops as libertarians tend to conclude. The solution is to reform the incentives the cops face.

  13. TO MIKE KONCZAI: I’d love to have this discussion over at the Atlantic Business blog, but it seems to be impossible to sign up there (after three attempts). Nor is technical assistance offered. Perhaps you know someone at the Atlantic who can look into this? I wonder if it might account, as well, for the low number of posts on Richard Posner’s blog there.

  14. Chris says:

    Capital is the buffer that protects banks (and all other firms) from bankruptcy. The real mystery here is why any bank would want to hold only the regulatory minimum in capital.

    You’re thinking like a ’50s banker. Who cares about avoiding bankruptcy in 2 or 3 years (or in the event of something the most popular experts say is impossible, never mind the fact that their positive thinking is WHY they’re the most popular)? You’ll be fired in a year if you don’t get a high enough rate of return and rising stock prices. Greed is good, and the company needs an aggressive risk-taker to seize the opportunities in today’s market.

    Positive thinking goeth before a fall.

  15. Pingback: Regulation and the Financial Crisis « Daniel Joseph Smith

  16. HB says:

    ptg wrote: “The real mystery here is why any bank would want to hold only the regulatory minimum in capital.”

    Few were even close to the regulatory minimum:

    “The five largest US financial institutions subject to Basel capital rules that either failed or were forced into government-assisted mergers in 2008 – Bear Stearns, Washington Mutual, Lehman Brothers, Wachovia and Merrill Lynch – had regulatory capital ratios ranging from 12.3 per cent to 16.1 per cent as of their last quarterly disclosures before they were effectively shut down”
    http://www.ft.com/cms/s/0/2ca160b0-a870-11de-9242-00144feabdc0.html?nclick_check=1

  17. Mike–Why indeed would anyone buy MBS? Because they seemed like a good idea at the time, especially with those AAA ratings.

    In my article in Critical Review, available as a PDF at http://www.criticalreview.com/crf/current_issue.html , I argue that (1) investors around the world probably knew nothing about these securities except their yields and the fact that they were rated AAA; (2) investment bankers who did the securitizing and understood how the tranching process worked also believed the AAA ratings–it was not only their selling point to investors, but was the basis of their willingness to expose their own fortunes and that of their institutions to these securities; (3) commercial bankers, who as a rule did not know what they were buying in any detail, also relied on the AAA ratings.

    (I will not make it easy on myself here to fall back on the fact that the rating “agencies,” i.e. Moody’s, S&P, and Fitch, had been effectively granted oligopoly status by the SEC, and that pension funds and other institutional investors were required by law to buy highly rated securities. I go into that, too, in my Critical Review article, where I consider the counterfactual of what might have happened had that not been the case. But that’s too speculative for blog discussion; and I want to see what happens to my argument if we just treat the AAA ratings as if they had been generated by completely free-market institutions.)

    Referring back to para. 2, my answer is this: The financial crisis was not caused by the fact that many random investors around the world, including pension funds etc., held MBS. Nor was it caused by the fact that the investment banks that securitized mortgages held them. It was caused by the extraordinary concentration of MBS in the *commercial banks.* Once Bear Stearns and Lehman (investment banks) failed because of *their* MBS holdings, commercial bankers realized that their lending counterparties–each other–might be insolvent because of those holdings. Lending froze; worldwide recession followed.

    So the question is: why did (many, not all) commercial banks put all of their eggs into the MBS basket?

    The answer requires empirical research that nobody has yet done.

    A starting point would be to compare the average MBS holdings in investors’ portfolios with the average in banks. A next step would be to compare investors’ portfolios with the banks that “overdid it,” such as Citigroup, as vs. those that did not, like J.P. Morgan. The best thing of all would be to interview bankers in confidence and ask them why they did (or didn’t) buy so many MBS. Wladimir Kraus of the University of Turin is pursuing this.

    In the meantime, though, I think the best tentative conclusion we can draw is that the apparently extraordinary concentration of MBS in the commercial banks was due to the Recourse Rule’s immense inducement to “leverage up” by buying MBS rather than any other investment (except other asset-backed securities, such as credit-card ABS; or Fannie and Freddie securities, which had the same risk weight under Basel I as the Recourse Rule gave to ABS). Otherwise, bankers who wanted more leverage would have bought a more diversified portfolio.

    Jeffrey Friedman
    Editor, Critical Review
    http://www.criticalreview.com

  18. Mike says:

    Are people still checking this out? Late to the response, but.

    - I look forward to reading that issue of Critical Review but I have not read it as of this writing.

    - I’m interested in what the researchers at Turin find out, though I’d be careful with the ethnography part of it. A teenager asked why he’s driving fast before an accident will tell you it’s because he’s a great driver; after the crash, it was clearly someone else’s fault (my first teenager car accident I blame on the Basel accords!). We do have a lot of records already, and more internal stuff that will be found and examined, as to what the internal thinking was with these; a quick view of the selling literature doesn’t bring up the capital reserving items. Were banks trying to minimize capital to be held (which would be weird that they held so much) or trying to maximize their access to AAA MBS securities?

    - If the second, why? For me, and perhaps this is discussed in the latest Critical Review, the obvious reason why commercial banks were piling into AAA securities is because they could be used as collateral to borrow against in the repo market. This exchange amounts to a capital markets banking system (colloquially a ‘shadow banking system’), and this new capital markets banking system, where AAA securities make fantastic collateral to borrow against, because of their diversification, high credit rating and importantly supposedly low credit migration (all things brought up in the CFO document above), became subject to a bank run when repo haircuts started to increase.

    I lay this out more formally (for a blog, anyway) here and here. In that first post, check out the first year list on the repo market haircut for structured debt (taken from Gary Gorton’s paper, written up by Ezra Klein; that line hugging the x-axis is all the incentive to pile into AAA debt one would ever need, provided you think housing will go up forever.

    I get a lot of people affiliated with the finance industry telling me privately since writing those that this is a narrative with strong legs, and I haven’t seen too much that challenges it on strong terms for me.

    Thanks for the comments.

    • I remain intrigued by Jeffrey’s idea that people who get paid tens of millions of dollars for skills in risk management, whose decisions piled up damaging amounts of toxic assets onto the balance sheets – whose decisions drove their company off a cliff – are not at all accountable for their business decisions – because of a government regulation.

      (And, as I understand it, that toxic mountain molders on the books of many banks, even today.)

      Jeffrey says: “Once Bear Stearns and Lehman (investment banks) failed because of *their* MBS holdings, commercial bankers realized that their lending counterparties–each other–might be insolvent because of those holdings. Lending froze; worldwide recession followed.”

      I find it hard to believe that the failures of Bear and Lehman were needed before people realized there wasn’t a lot of meat in those MBS securities. How can people who get paid so handsomely for their skills not have realized the utter chaos in the housing market? My realtor knew (my REALTOR!) – both of the bubble and of the fact that bankers were lending out whatever money the consumer asked for – no income needed. She warned us when we bought a house in 2004 – four years before the crash. But the guys on Wall Street who got paid so handsomely were clueless? Or felt the regulation gave them a free pass to engage in terrible business practices? Or profited while they could because there was an implicit belief the feds would bail them out when they tanked? Of those three dismal ways of conducting a business, not sure which is worse.

      I believe that the panic after Lehman was because Paulson changed horses midstream – prior to Lehman, there was nothing at all to indicate the feds WOULDN’T bailout insolvent banks. When he let Lehman fail, it was a clear signal that a) they were all indeed dependent on the feds for survival and b) there was no clear cut way to figure out who Paulson would let live. (Though it was a good bet he wouldn’t let Goldman go down.) And every leader at all those many banks knew that everyone had been playing the game of leverage and all of them were at risk of sharing Lehman’s bloody fate. So they hung on to every penny they had in stock….

  19. “As a crude example, let’s say regulators required banks to hold 8% of capital, but that was too low and banks should have held 16% of capital. If banks would have naturally held 16% without regulators because markets work here, why wouldn’t they hold 16% with regulators requiring a floor?”

    Because of the context of these regulations. The regulations are essentially a set of conditions of a promise: “if you follow all these rules, which we think codify the proper way to operate a bank, and you somehow still run into trouble, we will help you out of it”. If you meet your 8% capital cushion and yet conditions end up requiring 16%, that’s okay, because the Fed will replace your bad investments with Treasurys or arrange your profitable sale to a healthy competitor or drop money from a helicopter.

    Regulations like this don’t augment market discipline. They *replace* market discipline with their own set of rules—rules that aren’t necessarily always correct, which do not vary from one firm to another, and which have no inbuilt correctional mechanisms.

  20. Joan says:

    I report this mail. It talks about the disasters caused by financial world and about the need of new rules:

    ———————————–

    LET’S TRANSFORM ALL TYPES OF FINANCIAL INSTRUMENTS INTO “BANKMENTS”

    This important e-mail isn’t spam because it hasn’t profit purposes. It is essential for everybody to read it.

    The actual world financial crisis was caused by unscrupulous financiers who have acted in a field with no precise and transparent rules.

    The result is in the public eyes: everywhere there are millions of unemployed and many lost savings.

    In these days all World Countries are evaluating the possibility of establishing new rules to avoid new crisis similar to the present one.

    In fact a lot of people believe that the world should erect legislative dams or embankments to prevent further abuses by unscrupulous speculators.

    For these reasons, it’s essential that all the existing instruments of financial investment are properly regulated and controlled. Some experts of economy have coined the term “bankment” to define each financial investment which has these requirements (formed from the combination of words “bank investment”, “financial instrument“ and “embankment”, or dam). In fact a fit regulation seems to be the only solution to avoid another economic crisis of such vast scope.

    We all must give our small contribution so that all existing types of financial instruments are transformed into “bankments”.

    The World needs new financial rules and everyone must know it and take the necessary measures.

    The only support which is asked you is to send now this mail to all your friends and relatives. In fact, if many persons know it, the World Governments will have to keep their promises and we will have new financial rules, clear and transparent.

    In these days a few men are deciding on our future. We must try to make it really better.

    TAKE CARE! This e-mail was translated in many languages, but some translations of it might have been made by automatic translation softwares. If you want, before send it you can correct eventual errors or translate it in other languages (absolutely without modify the text): your contribution will be very precious!

    ———————————–

  21. Ashley says:

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  22. Pingback: FDIC Charge Versus a Systemically Risky Bank Fee « Rortybomb

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