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By Root 745 0

Banks moved assets off their balance sheet using structured finance. They set up off balance sheet entities that owned the assets and issued debt. Now the banks may have to take $5 trillion in assets back on balance sheet as if they had never been moved.37 Although the vehicles currently pay for themselves (their assets meet their debt payments), if the assets’ quality falls into doubt, banks might have to bail them out (as Bear Stearns bailed out the creditors in the hedge funds).The banks would have to borrow more money from the Fed. Even if that does not happen, banks’ debt to equity ratios will increase, and banks will be less willing to lend you money.

We have too many ineffective regulators: the OCC, Fed, OTC, FHFA, SEC, FDIC, and more. Watching the regulatory system is like watching bad doubles tennis players. No one hits the ball thinking the other guy will get it. Investment banks are not suffering from too much regulation.The global capital markets are suffering from too little competent regulation where it counts most.

The Fed, Congress, the Treasury, and the Bush administration wanted you to believe they have solved the “regulatory problems.” On March 31, 2008, a couple of weeks after the Bear Stearns deal, Treasury Secretary Hank Paulson rolled out the “Blueprint for a Modernized Financial Regulatory Structure.” The draft of this report was prepared in November 2006, when the Treasury alleged excessive regulation caused the U.S. financial markets to lose its competitive edge to London in the global financial markets. In other words, it called for less regulation, not more.38

At its core, the mortgage lending crisis is no more sophisticated than a schoolyard swindle, and the SEC is the principal. Economists and pundits unhelpfully—and conveniently—focused on the Federal Reserve Bank and retired Chairman Alan Greenspan. Others blame the rating agencies.Yet neither the Federal Reserve Bank nor the rating agencies regulate the securities industry. That job belongs to the SEC. The SEC has broad authority over banks, too. The Office of the Comptroller, the OCC, examines the risk management of the capital markets areas of banks. The Federal Reserve Bank primarily looks at banks at the holding company level.The SEC has broader authority than either the OCC or the Fed for publicly traded companies. It is deceptive securitization practices at the root of the mortgage bubble, and the SEC had the authority to stop Hurricane Ponzi. Instead, it slumbered.

Wall Street acts fast, and its regulators move at glacial speed. In other words, the existing regulation—even if it demonstrated the will to be proactive, which it did not—is too slow.The system is doomed to repeat its failures, because as Benjamin Graham observed, when things are going well in the financial markets, there is “a strong temptation toward imprudent action.”39

As long as Wall Street enhances revenues with leverage to prop up kingly bonuses, as long as there are few personal consequences for CEOs (and board members and other top executives) for shoddy risk management, as long as CEOs are allowed to walk away with millions, nothing will change. The fact that shareholders are wiped out is no deterrent, and moral hazard will live on. I see nothing that will change that in future. In fact, just the opposite. We have handed out hundreds of billions of dollars in taxpayer dollars and have put hundreds of billions more at risk without demanding effective conditions.

Our bailout bills are mounting. The treasury has extended more “temporary” credit lines to the 12 Federal Home Loan Banks, and the government has an additional $90 billion in exposure to the FHA.A new housing bill created a $4 billion fund for local governments to buy foreclosed homes, a $7,500 tax break for first-time home buyers, and a $300 billion insurance fund for refinanced mortgages (but no clear way on how to control the risk of the new mortgages). As of July, there is an 18 month line of credit for Fannie and Freddie to borrow from the Fed, and Bazooka Hank has authority to purchase shares.