Regulation of Finance

The advisories on regulation of the Wall Street seem to be of the “deeply vested interest” type. I wish that news sources like BBC, Barrons,  The Economist, Forbes, Fortune, NYTimes, Washington Post and many other adhered to the disclosure rules required of financial “experts” on TV programs like Nightly Business Report and MSNBC. And these should be extended to political commentators as well – let us know who these experts have worked for in the past 2-3 years so we gain gauge how much of bias we might be hearing in their analysis. I mention this because I have seen commentaries that the RTC-Revolution Trust Corporation that did the bailout of the Savings and Loan fiasco of the late 1980’s through to 1995 (this is an indication of how long  TARP will be in business) made money for taxpayers and worked relatively efficinetly. However, a quick check on the Web resulted in finding the  GAO Final Report on RTC which do not sustain either view point. RTC cost taxpayers $87.9B and the effort wrapped up with several contentious items regarding the efficiency of the latter day efforts of RTC (another warning sign of the difficulties which TARP may very well encounter).   Now this is not to say that RTC was ineffective in doing what it was designed to – in fact, RTC well prevented  further financial repurcussions . However it may well have set a Moral Hazard precedent – Wall Street scorning regulation and controls when they are profitable; but when the financial system starts to seize up due to Wall Street excesses.  Then a rescue is expected starting with FED lowering of interest rates and ending with the currently $700B bailout (and nobody really knows the amount because the large financial institutions have yet to come clean on the amount they have on their books).So now there is a real worry that the bailout simply will be a Financial Iraq. Congress will be stampeded into rubber stamping a bailout process that is so cunningly simple that it gives Secretary of Treasury Henry Paulson unprecedented powers with no oversight, only semi-annual review, and no restraints on what the Secretary does. Yet the record for well contructed regulation – and I will cite Sarbanes Oxley which even the HBR-Harvard Business Review has found to be beneficial. First Sarbanes Oxley has the Bush benefit – there have been no accounting travesties since Sarbanes Oxley has taken effect. Second, it has helped to sharpen accounting processes in companies large and small. And third, as pointed out in the HBR article, it has refined the process  and  strategy of control in the US.  Finally, it has enhanced Business Intelligence and Analytics in companies that helped to make them more manageable. So TARP and the bailout does not have  to be ineffective; but if the current deadline oriented negotiations are rushed – then RTC II upscaled by a factor of 10 will result. I don’t like the Paulson -Bernancke rush to solution.

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