Let’s Ask the Fox to Guard the Hen House…….Again

I am traveling with an old friend, Bruce Bradley. Bruce got his start in politics as the advance man for Bill Miller, Barry Goldwater’s Vice Presidential candidate in 1964. Bruce supervised Henry Kissinger during Nelson Rockefeller’s run in 1968. He also is an old friend of Gary Hart’s, who lived with Bruce during his first term in Washington. Bruce ran a Wall Street firm in the 70s, so he is an old hand at this business. I asked him to offer his thoughts on the latest “crisis.” Here you go:

By Bruce Bradley

It is a curious irony that the new, fragmented oversight regulators look a lot like the old. If, and when, Congress passes a bailout package that the President supports, the same regulators, the Fed, Treasury, Comptroller of the Currency, HUD, FDIC and others will be in charge of monitoring, shoring up, and regulating the financial institutions and insurance giants. These are the same “leaders” who failed to regulate going into the current “crisis.” If we had been told this time last year that Bear Stearns, Lehman, Goldman, Morgan Stanley, Wachovia, and AIG would no longer exist in their present form or at all, we would have thought the world had come to an end. Where was the SEC when it came to monitoring net capital requirements for some of the world leading investment houses? Where were the insurance regulators when AIG’s $450 billion in the credit-default swaps market, which support investment funds and world banks, when they should have been raising red flags? What were the Congressional oversight and regulating committees doing as the brand names of finance, banking, and insurance were sliding into the abyss? These giant failures reside in highly regulated sectors.

The Fed has done a decent job of leaning into inflationary pressures and calibrating monetary policy. Why can’t it do a decent job of monitoring financial activity in banking and finance and anticipate precisely what we are experiencing. In short, regulators have been asleep at the switch and excesses have become excessive. Thirty years ago finance accounted for ten percent of America’s corporate profits. Recently it reached 40%. When almost half of the world’s leading economy’s profits are generated by regulated financial sectors one would assume that the collective oversight and regulatory agencies and committees would have voiced concern. One would have assumed that the financial media and general media would have uncovered and reported on the pending demise of some of the world’s leading investment banks, insurance giants, and commercial banks. Not so; did not happen.

Finance is smarter than those who regulate it. Finance and markets allocate needed capital more efficiently than think tanks and planners ever will. Financial thinkers will continue to move faster and more creatively than those who regulate its component parts. Yesterday, we had agency players, today we have principle traders. Financial institutions have morphed into hedge funds, and hedge funds remain unregulated. Regulation designed after the Great Depression is inadequate to deal with today’s global financial trends. Transparency and risk accounting must be a part of oversight and regulation going forward. At some point, regulators will have to review and regulate the derivatives of derivatives which quants trade on a minute by minute basis. New regulation should be tough and punitive. Only those willing to tolerate harsh sanctions and straight jacket regulation should be “bailed out.” The new Government Rescue Corp should be temporary and transparent.

Once the hysteria has subsided, the blame game will rage with amplified derision and insult. Congressional Committees will begin hearings. The media will write stories most of which will focus on how this all happened. Regulators will request new tools to deal with modern problems. The leaders of the Fed, FDIC, HUD, Treasury, and SEC and on and on will be called on the carpet by the relevant Congressional Committees. This collective den of foxes will explain, finger point, evade, and distort. The media foxes will report. We, the chickens, will watch the foxes and attempt to lock the hen house from the inside.