To the extent one believes that regulators can actually get a firm grasp on what the megabanks are doing, what they own, and what they owe, or reliably distinguish risky and reckless practices from safe and sound ones, the president’s vision — the vision espoused in the Dodd/Frank bill — has a chance of succeeding. We certainly don’t want to get in the way of his trying. By all means, give the regulators the tools they ask for and let them do their best.
It’s just that there is so very little evidence that they can succeed. The glaring and disheartening truth is that the regulators endorsed every one, and required some, of the practices that led to the crisis. Even the staggering complex mortgage-backed securities at the heart of the crisis, with their bogus AAA ratings (conveyed by government-regulated ratings agencies), were produced in such huge volume largely because the regulators had blessed them as the safest of all possible bank investments short of U.S. Treasuries.
Still, some version of the Dodd/Frank bill will become law within weeks or days. Republicans should not obstruct that effort. On the contrary, they should offer their full support. Better regulation is one possible answer to the problem. But in return, Republicans should ask for one little thing.
The Democrats want better regulators. That’s a Democrat thing. Republicans should want better markets. That’s our thing. And they way to get better markets is to give them better information. Markets failed two years ago because for many years, markets were denied the information they needed to make good decisions, to separate good mortgages from bad, good banks from bad, and shift capital accordingly.
For too long, American banks have operated in the shadows, their inner workings hidden not from regulators (who have an invincible legal right to examine every line in the banks’ books) but from citizens and investors. That’s why we have proposed the one truly radical reform that would have prevented the both the mortgage crisis and the crash and would do far more to prevent future catastrophes: Require every significant financial institution in U.S., every firm managing other people’s money, to disclose every investment position, every asset, and every liability every week, between market close on Friday and market open on Monday morning.
We don’t mean mere accountants’ summaries. We mean the raw data. Every stock, every bond, every long, every short, every hedge, every swap. All of it. Collectively millions and millions of lines of data.
At first it would be too much data even to be useful. But as the short sellers and curmudgeons, the rag-and-bone shops of the financial world, gradually absorbed the data and constituted massive parallel-processing systems over months and years, we bet the result would be an early-warning system that would run rings around the regulators and do far more to keep the banks on the straight and narrow than any grand high council or regulatory poo-bahs.
We say not one word against the grand high council. Let them commence their duties this minute. But let’s give them some help. Let’s back up dozens, nay hundreds, of regulators with millions of citizen investors. Let’s build redundancy into the system. In the end, letting our fellow citizens back into the game is the best protection we can have.
– Andrew Redleaf and Richard Vigilante are respectively CEO and communications director of Whitebox Advisors. They blog at www.capitalismbetrayed.com.