Oh I Feel So Safe Back in the Arms of Our Dear Leaders!

We will see the law of unintended consequences arrise from this:

“[Senator] Dodd’s 1300-plus page proposal includes a laundry list of items: a new consumer financial protection agency, new supervision of hedge funds and derivatives trading, a reshuffling of banking industry regulators, investor protection, new federal authority to handle too-big-to-fail financial firms meant to limit taxpayer bailout funds and the creation of a systemic risk council as part of an early warning system.”

Kids, repeat after me and tap your ruby red slippers three times: you can’t legislate away human behavior, you can’t legislate away human behavior, you can’t legislate away human behavior…Followed by: bigger bubbles will follow, bigger bubbles will follow, bigger bubbles will follow…

Seriously, doesn’t it appear the United States federal government is attempting to strap a diaper on all of us? I get the idea of a diaper’s job, but guess what: When everyone shits away it might not hit the floor, but it will still smell awful — diaper or not.

8 thoughts on “Oh I Feel So Safe Back in the Arms of Our Dear Leaders!

  1. If the govt would allow companies to go bankrupt then the need for reform is lessened. But they aren’t allowing companies to fail so they will use the reform lever.

    I’m curious on one topic – with estimates of unregulated derivatives worldwide at $500 trillion or more, do you not believe that at least some level of regulation is needed?

    thanks for your thoughts…jim

  2. Before new legislation is passed, I’m still waiting for a feasible explanation of why regulators didn’t catch Madoff’s scheme?

    Regulation is useless. Accounting rules are a joke.

    How about transparency?

  3. Well, Dan is correct, mostly. The one regulation (actually a transparency requirement in the form of a regulation) that would have stopped this entire mess in its tracks, beginning way back in 1983 with the first swap, would have been a very simple accounting regulation:

    “No registered and regulated financial entity may list as an asset on its balance sheet any financial instrument or contract (other than an entity-originated loan or mortgage, held by that entity) unless the instrument is listed and traded on a regulated exchange.”

    What this simply says, translated, is that no matter what the Masters of the Universe create (interest rate swaps, options, swaptions, cmos, cdos, cds, etc.) every instrument must be traded where it shows a bid and an ask, or the bank, insurance company, mutual fund, hedge fund, mutual fund holding it would have to value it at zero.

    How would this have saved us? Well, in 1981 when swaps began, their growth and range (and profitability)– but mostly their systemic risk–would have been restricted due to the requirement that the market of traders constantly value them. What we had instead was permission for the entities themselves to value their “balanced book” of derivatives. As for how that worked out, look at Bear, Lehman, but most of all AIG. The AAA CMOs and CDOs that were sold all over the world as safe investments would never have carried that kind of bid and ask if traders had been able to value them. The creators knew they were toxic, but had the $$$ wherewithal to get top ratings from the captive ratings agencies.

    If a CDO was sold in 1996 for $1,000,000 and then traded at $990,000 ~990,500 bid ask a few months later, how much appetite do you think Norwegian towns would have had for this financial gunk?

    Some introductory derivative information:



  4. Government doesn’t create jobs and can’t create safety nets either.

    The slime in the “investment” world will find loopholes or just create new financial vehicles not covered by the current (or soon to be) regulations.

    The only thing government regulation does is make it harder for those who actually play by the rules to make a profit… although some would argue that this is the focus of the current administration anyway.

  5. Don’t mean to be picky but the message of Oz is lost if the slippers are not depicted as in the original text. The slippers were silver. Perhaps you might refer your readers to this lovely article.

    After re-reading The Wizard of OZ twice I came to the conclusion that there wasn’t one sentence in that story that wasn’t deliberate and brilliant. The Wizard of Oz told of everything that is still going on today from the lying politicians in the emerald city to to the poppy fields in Afganistan.


  6. Trader Jim,

    There is a place for govt regulation. Just as I would not want to live in a town that had no police, no fire stations, no building and fire codes, I would not be comfortable speculating in markets without regulation. Case in point, I will only trade forex in the futures markets because the exchanges and the brokers are regulated, rather than the cash forex markets where a lot more tricks occur. Some may differ, that’s fine.

    The cure for the recent problems of the capital markets is not less capitalism but more capitalism, but of the transparent kind. Only regulators can require transparency. The fact that they slept at the switch from 1981 to now doesn’t mean that good regulation doesn’t or won’t work, only that it has been missing in action.

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