IGNORE REGULATION NOW, PAY (again) LATER

Yves Smith at nakedcapitalism has an interesting post on the new regulations proposed by the Federal Deposit Insurance Corporation (FDIC), the federal institution that insures your bank deposits. The goal is to put some limits on the stupidity and greed that helped bring down our markets, and threaten to do so again (because we've done nothing to alter behavior, and have left the same guys playing the same games).

These three suggestions stand out:

1. SEASON THE LOANS: Make sure mortgages are "seasoned" - or maintained with the loan originator - for 12 months before they can be passed on to other market players (who either packaged or cut up mortgages to be sold elsewhere).

2. REAL BUY-IN: Loan originators must maintain a 5% stake in the mortgage contract after it's sold. The ideas is that if loan originators have a stake, they will write better loans.

3. NO CDOfication: Collateralized Debt Obligations (bundling up loans that are sold as a security) are not permitted.

If these proposals are real I like them, as a start.

Now, I'm sure there are some people out there - like the parasitic sociopaths on Wall Street who got us in this mess - who are probably going nuts over the idea of regulating the market. I say to hell with them.

They should have learned something from the market collapse, but didn't. One thing they haven't learned (nor appreciate) is that, were it not for the trillion dollar bailout, many of the those complaining about financial and security regulations would now be in court fending off lawsuits, or in jail (because the bailout helped fill financial gaps - especially by allowing collapsed securities to be used as collateral for government loans - securities related lawsuits declined dramatically in 2009).

What these parasitic sociopaths fail to understand is that markets don't self-regulate. Market players don't always do the right thing. Consider the following.

Part of what started our economic landslide were unregulated over the counter (OTC) markets. Market players bought and sold complex financial instruments (derivatives) in OTC transactions that few understood, and even fewer could justify as a meaningful contribution to society. These transactions did little more than inflate claims on money between Wall Street power brokers, and created a massive bubble economy. We're now paying for these acts of greed and stupidity in the form of collapsed home values, increased unemployment, rising credit card rates, reduced tax revenue and higher government debt, etc.

How much did they inflate market claims? Brooksley Born, former head of the Commodity Futures Trading Commission (CFTC), said that by June of 2008 trading on the OTC markets surpassed $680 trillion. How big is this amount? The total amount of goods and services the U.S. is expected to produce this year is worth around $14 trillion. Six hundred and eighty trillion dollars, according to Born, is more than 10 times the gross national product of all the countries in the world, combined.

The worst part of this is that market players (they're not investors) were gambling with borrowed money, and providing insurance on products that they could not pay claims on because they didn't have enough capital on the books. One of the few people who saw what was happening in the 1990s and tried to do something about it was Brooksley Born. For her efforts - to secure information (which started with a concept release) and regulate the OTC market - Born  was beat up politically, and effectively muzzled, by Alan Greenspan, Bob Rubin, and Arthur Levitt.

You can read about Born's warning here, or you can watch "The Warning" on Frontline here. It really does a great job of explaining what we're up against. What's clear is that we can ignore the calls for regulation now, or pay (again) in the future.

- Mark