Wednesday, December 23, 2009

Holiday Tonic III

December 23, 2009:
The bravest are surely those who have the clearest vision of what is before them, glory and danger alike, and yet notwithstanding, go out to meet it.

— Thucydides, History of the Peloponnesian War, Book II

Courage is not the absence of fear, but rather the judgment that something else is more important than fear.

— Ambrose Redmoon

You become a champion by fighting one more round. When things are tough, you fight one more round.

— "Gentleman Jim" Corbett

Woody Allen is often credited with saying something like eighty percent of life is just showing up. Sometimes—like during the economic horror show we have just lived through this past year—I think the point is simply to endure.

Hopefully, a little reflection will remind you just how many important things in your life are worth enduring for.

Happy and healthy holidays to you and your loved ones. Be good.

© 2009 The Epicurean Dealmaker. All rights reserved.

Monday, December 14, 2009

A Few Things Worth Considering

From one of the more underrated political philosophers and students of human nature of our time:
Governments, if they endure, always tend increasingly toward aristocratic forms. No government in history has been known to evade this pattern. And as the aristocracy develops, government tends more and more to act exclusively in the interests of the ruling class — whether that class be hereditary royalty, oligarchs of financial empires, or entrenched bureaucracy.

* *

Good government never depends upon laws, but upon the personal qualities of those who govern. The machinery of government is always subordinate to the will of those who administer that machinery. The most important element of government, therefore, is the method of choosing leaders.

* *

What you of the CHOAM directorate seem unable to understand is that you seldom find real loyalties in commerce ... Men must want to do things of their own innermost drives. People, not commercial organisations or chains of command, are what make great civilizations work, every civilization depends upon the quality of the individuals it produces. If you overorganize humans, over-legalize them, suppress their urge to greatness — they cannot work and their civilization collapses.

— Frank Herbert, Children of Dune

All laws and regulations are only as good as the people who create, interpret, and implement them. Given the dominant strains of careerism, materialism, and narcissism among our current socioeconomic elites, this observation falls squarely on the side of those who counsel cynicism and despair.

In the long run, the biggest challenge we face is not writing new laws and regulations, but rather choosing better leaders. We might approach this project first by figuring out how to raise better humans.

Ah, if only it were that easy ...

© 2009 The Epicurean Dealmaker. All rights reserved.

Thursday, December 10, 2009

For Every Action ...

Christopher Columbus: "Hello there, hello there. Heh, heh. Ahh ... We white men. Other side of ocean. My name ... Chris-to-pher Co-lum-bus."
Indian chief: "Oh? You over here on a Fulbright?"
Christopher Columbus: "Hah? Uh, no, no. I'm over here on an Isabella, as a matter of fact. Which reminds me: I wanna take a few of you guys back with me in the boat to prove I discovered you."
Indian chief: "What you mean, discover us? We discover you."
Christopher Columbus: "You discovered us?"
Indian chief: "Certainly. We discover you on beach here. Is all how you look at it."
Christopher Columbus: "Ah, I never thought of that."

— "Columbus Discovers America," Stan Freberg Presents the United States of America, Vol. 1: The Early Years

It looks like Alistair Darling is going to have a quiet Christmas.

The UK finance minister unveiled a nasty Christmas surprise for bankers in the City yesterday: a 50%, non-deductible tax on discretionary bonuses in excess of £25,000 (or $41,000), to be levied against their employers' net income. This scurrilous government attack against chalk stripe suits, Soho strip clubs, and London property values landed with a sickening thud in Old Blighty. Many a banker's wife summarily cancelled their holiday plans and started contacting real estate agents in Geneva.

Today, Nicolas Sarkozy of France had the unmitigated gall (Unmitigated Gaul?) to pile on with a parallel policy proposal for his country's budget and an editorial in The Wall Street Journal, co-authored with famously dyspeptic Scot Gordon Brown. The fact that France agrees with the UK and is proposing a similar policy is proof positive that either La Republique has been secretly taken over by a stunted Englishman pretending to be French or the UK's Labour government is so desperate to retain power that it's turning Gaullist. Probably both.

In any event, the policy—as do all new tax policies at the end of the day—has triggered a desperate surge of scurrying about by bankers and banks, as they attempt to discover ways out of the trap. Their prospects do not look good.

London contacts report senior investment bankers stacked three deep on the pavement outside advisory boutiques' offices this morning, banging on the custom paneled mahogany doors to get entrance for interviews. One Vice President remarked he hadn't seen that many bespoke suits in one place since he stumbled into Gieves and Hawkes' basement storeroom on Saville Row by mistake. I predict independent UK advisors will quintuple their headcount by Christmas.

The bankers they don't hire will all get fired by their employers and rehired immediately with guaranteed bonuses—which are exempt from the new tax, for now—or put on retainer as fiendishly well paid independent contractors. The Freelancers' Association of Great Britain should see its membership rolls and dues receipts increase 10,000%, and HM Treasury will no doubt promptly reclassify it as a bank for tax purposes. The stately annual dance of new tax regulation, evasion, and counter-evasion will begin to resemble a cage match at the Ultimate Fighting Championships.

The only parties for whom this will be an unalloyed benefit will be tax lawyers, accountants, and corporate relocation specialists. Their spouses and families won't see much of them over the Christmas holiday, but at least they'll be able to console themselves with frozen rum punch and figgy pudding in £10,000-per-night suites on St. Barts.

* * *

Despite all the frantic squealing by outraged bankers, it is clear the UK government enacted this policy not to "recapture" excess compensation from individual employees through personal taxation, but rather to dissuade banks from paying more than nominal bonuses at all. Instead, it wants them to use the money they save to bolster their weakened balance sheets. Chancellor Darling could not have been clearer:

“I’m giving them a choice. They can use their profits to build up their capital base, but if they insist on paying substantial rewards, I’m determined to claw money back for the taxpayer,” he said.

And, as the following little spreadsheet indicates,1 he plans to do this by making banks choose between their employees and their shareholders:

Given a hypothetical bank with operating profit before discretionary compensation of one million pounds and one employee which management intends to pay half a million quid, the three rightmost columns show the effect on both employee and net income under the new policy under three different scenarios. Under the first, "equal bonus" scenario, the employee still walks away with his £500,000 pre-tax bonus, but instead of earning £360,000 as before, shareholders take a 66% hit to net income, to £122,500. Under the second, "equal net income" scenario, bank management preserves shareholder income at the pre-policy level of £360,000, but the banker walks away with 39% fewer pre-tax shillings. Finally, in the third, "equal pain" scenario, the bank tries to share the pain of the new policy equally between employees and shareholders, and each take a 24.5% hit to their earnings.

Of course, a stubborn bank could go right ahead and pay full discretionary bonuses to its employees, and under the new policy HM Treasury would drain half the excess straight out of the bank's equity account. This hardly seems conducive toward strengthening capital ratios in the financial sector, however. Presumably the government is relying on bank shareholders to scream bloody murder should management try this, not to mention bank creditors, who will scowl with disapproval as their obligors' creditworthiness looks to sneak out the door to a Ferrari dealership in the pockets of its employees.

Interestingly enough, this scenario is also one in which HM Treasury maximizes its own tax receipts, from the personal income and National Insurance tax paid by individual bankers on larger bonuses plus the direct corporate tax on excess bonuses. The silly thing about such a scenario, however, is that the UK government would be far more likely to have to plow its higher tax revenues right back into the newly weakened banking sector in the form of more direct support. Talk about a "doom loop."

Another complicating factor in this whole discussion is that employees often make up a substantial portion of their employer's shareholder base, especially at investment banks. At the extreme, if a bank had only one employee who also happened to be the sole shareholder, a proper tax minimization strategy would be to forgo a discretionary bonus entirely and book that amount into net income. This is because the standard UK corporate rate of 28% is far less punitive than the new 50% top personal rate for high earners, plus National Insurance deductions. But how would Mr. Eddington-Smythe pay his local grocer? Borrow money from his employer, perhaps? Oops, there goes the leverage ratio again.

* * *

On this side of the pond, the evil genius cephalopods at Goldman Sachs have come up with a different approach. The firm announced today that its 30 top executives will take all their discretionary compensation this year in the form of restricted stock, which they cannot sell for five years.

In principal, this strategy actually makes more sense than the UK tax policy does in terms of bolstering banks' and investment banks' balance sheets. For one thing, it implicitly acknowledges that a bank probably should pay something more than a £25,000 bonus to highly productive employees if it expects to keep them, and it puts no explicit upper limit on that pay. For another, it conserves the gajillions in cash a bank would otherwise pay out in bonuses and replaces it with common stock, and unvested common stock at that. That bolsters both the cash and shareholders equity accounts by the amount of deferred bonuses and strengthens the company's credit position. Furthermore, as I have pointed out before, bankers who receive deferred stock compensation are the best kind of shareholders to have, from a credit standpoint, because they are involuntary, long-term providers of permanent capital. No high frequency traders, these.

However, it's worth noting that as announced this policy only applies to the thirty Executive Committee members at the Squid. So, while it may conserve $300 or so million extra cash which would otherwise have been paid out as the cash portion of these executives' bonuses under prior policy, it says nothing about the up to $10 billion in cash which could presumably get sucked out the window in the pay packets of its non-executive employees. As a public relations stunt, and a sop to Congressmen and other populists on the warpath, it is genius, and Lloyd Blankfein and the other 29 sacrificial lambs probably have enough liquidity to weather the privation. But as a credit bolstering event for Goldman Sachs, it probably nets out close to a wash.

In addition, Goldman's new policy carries a real cost, too: increased dilution for non-employee shareholders. For, as our hypothetical little exercise above should have illustrated, there is a natural struggle over the spoils within a bank between its employees and its outside shareholders. The Goldman announcement makes no disclosures on this topic, but I can assure you top management is having heated discussions with major shareholders right now over just how many basis points of net revenue will go to investors and how many to the hired help.

* * *

This argument may be quite interesting to the parties involved—and their wives, mistresses, and household staff—but it has little practical import for those of us on the outside looking in. In fact, strong arguments can and have been made that an excessively large portion of the filthy lucre Goldman and other US banks' investors and employees are arguing over this year doesn't properly belong to them. A huge portion of the outsize sales and trading profits which have been fattening domestic banks' income statements is due to cheap funding provided both directly and indirectly by the government, direct subsidies from the US taxpayer, and the selective elimination of industry competitors through direct and indirect government action during the height of the financial crisis.

People who object to this situation claim the only sensible thing to do is for the taxpayers to claw back a chunk of these profits in the form of a windfall profits tax. Properly designed, such a tax would be levied against operating profits before compensation expense. Then, taxpayers would get back a portion of the outright subsidy they have been handing to the bankers, and bank employees and outside shareholders would be free to squabble over the remainder. The biggest challenge here, of course—apart from worrying about how to prevent politicians from making a temporary windfall profits tax permanent—would be to determine the proper amount of subsidy, and hence tax, to recover. The answer will always be somewhat arbitrary at the end of the day, but there is no reason a sensible number could not be figured out by a couple of accountants with a calculator and a bottle of scotch.

* * *

In any event, the policy tensions both here and abroad are clear: do we want banks to reduce employee payouts, retain capital, and bolster their weakened balance sheets, or do we want reparations of unearned, "excess" profits in the form of corporate, personal, or windfall profits taxes to the public purse? For conundrums like these, we have few instruments available except tax policy. But tax policy is a blunt instrument, and it acts on the economy a lot like a water balloon: every time we squeeze one end, the other end swells up bigger than before.

Moreover, I am sad to say that all available evidence seems to indicate our water balloon is a whoopee cushion, too.

1 Please, please, UK types—especially accountants and tax advisers—cool your jets. I know this example is a gross oversimplification, and it simply does not reflect all the relevant details, the intense value added which you and your firm can bring to the discussion with your extensive expertise, blah, blah, blah. It is meant to illustrate a relatively simple point, for which task I believe it is perfectly adequate. As usual, regular readers of this site know not to take my scribblings seriously in any respect, much less in the cloistered thickets of taxation and accounting.

© 2009 The Epicurean Dealmaker. All rights reserved.

Monday, December 7, 2009

We Didn't Start the Fire

Rob Slolom: "Wow. Eight Oscars, 400 million dollars at the box office, and you saved Tugg Speedman's career."
Les Grossman: "I couldn't have done it without you."
Rob Slolom: "Really?"
Les Grossman: "No, dickhead. Of course I could. A nutless monkey could do your job. Now, go get drunk and take credit at all the parties."
Rob Slolom: "I wouldn't do that."
Les Grossman: "Ah ... joking. "
Rob Slolom: "Ah, there he is! Funny. You're a funny guy."
Les Grossman: "Yeah. But seriously, a nutless monkey could do your job."

— Tropic Thunder

For what it is worth, O Dearly Beloved, you cannot count me among the rabid, spittle-flecked populists who lump private equity plutocrats in with venal investment bankers, clueless commercial bankers, meretricious mortgage brokers, and Nancy Pelosi's manicurist as the principal agents of our current economic desuetude. While it is true that many of these would-be Captains of Industry did purchase companies at preposterously high valuations in 2006 and 2007 at the orgiastic climax of the Sino-Greenspan credit bubble, the most the majority of these hapless boobs can be accused of is getting their wee-wees caught in the woodchipper of mistaken opportunity.

Vast herds of professional morons in the fixed income investor community apparently thought it was a brilliant idea to offer virtually limitless quantities of debt at virtually invisible interest rates with virtually zero credit protection to picayune ex-investment bankers so the latter could snap up the flower of American (and global) industry at 250% of retail. With limited exceptions, said PE types said "What the hell," and signed on the dotted line. After all, their fiduciary and professional duty to their own investors is simply to maximize returns on contributed capital. And, in the unexpected case their investments went belly up, the PE professionals and their limited partners could just hand over the keys to the failed portfolio companies to their embarrassed lenders. What was not to like?

Of course, many of the overlevered companies owned by private equity firms are now struggling or have failed entirely. Hundreds if not thousands of employees who worked at these investments have been laid off, and thousands if not millions of citizens whose pension funds or universities invested in their shitty debt have taken it in the neck. But caveat emptor, eh?

Like many other participants in the Great Financial Clusterfuck of 2008, private equity professionals helped make things worse for everybody through the unholy combination of personal greed, institutional incentives toward excessive debt, and general shortsighted arrogance, but they did not cause the crisis. Furthermore, I do believe the version of the private equity model which focuses on making substantive operational and strategic improvements to portfolio companies—rather than just levering them up the wazoo and hoping for the best—is a valid and effective alternative investment strategy in this economy. Many companies can be materially improved by the tender ministrations of a cigar-chomping five-foot-four inch sadist who would just as soon waterboard a manager as look at him. And they were.

* * *

Paragons of Sweat Equity Capitalism or not, private equity professionals are coming under the legislative microscope along with all the other financiers and hangers on who wear suits that cost more than the average Congressman's car. But in their case, the focus of regulatory reform is taxation, particularly that form of personal taxation peculiar to our hobbyist industrialists and known to all and sundry as carried interest.

I will let Floyd Norris explain:

The “carried interest” tax break lets private equity partners claim that their compensation is really long-term capital gains, since they are allocated percentages of the profits earned by their investments.

The Ways and Means Committee wants to end that, and today a trade group, the Private Equity Council, protested:
“Raising taxes on growth investments by private equity, real estate and many other partnerships just doesn’t make sense — particularly in this time of fragile economic recovery and continuing joblessness. By more than doubling the tax rate, the carried interest proposal will discourage investment; deprive many American businesses of the capital they need to survive and grow; and jeopardize critical job creation opportunities.”

Uh, no. I call bullshit.

We have been down this goat path before (masochists see "Related reading," below), and I remain utterly unconvinced that raising the personal taxes of a couple thousand billionaires, multi-millionaires, and would-be millionaires on the fruits of their labor would have any effect whatsoever on the ability of corporations to find private equity backers for their businesses. After all, the entities which provide approximately 95% of the equity which these Scrooge McDucks play with—pension funds, university endowments, and other large institutional investors—are either tax exempt or completely indifferent to the plight of their PE portfolio managers. And if a couple hundred of these quackers decide to take their (relatively) paltry marbles off the table and stalk off in a huff to endless champagne and chlamydia on the French Riviera, I don't think anyone will miss them.

Then there's the whole "fairness" issue. I will let Mr. Norris expound his view:

Personally, I am not sure that capital gains should get tax breaks anyway. But for private equity partners, who are earning huge sums of money by their skill at investing other people’s money, it seems particularly inappropriate. They earn money from their labor, just like the rest of us.

May I suggest a simple rule to be considered by Congress. “No executive should pay a lower tax rate than the rate paid by the person who cleans the executive’s office.”

There, that should set a few sardonic memoirists' blood boiling.

* * *

On the other hand, I seem to recall reading that the CBO estimated the aggregate proceeds to Treasury from taxing Steve Schwarzman and his fellow übermenschen like normal human beings would only amount to a few billion dollars over several years. So it's not like we're gonna recover the money we've pissed down the drain at Citibank and AIG by picking Henry Kravis's pocket. But then again, every dollar counts, and if I can avoid paying a few more shekels in taxes because we decide to stop treating pencil-necked MBAs like Andrew fucking Carnegie, I will be more than satisfied.

And if the private equity plutocrats don't like it, I would point them to the immortal words of yet another flaming asshole of my acquaintance: "That's baseball."

Related reading:
Tax Breaks for Everyone! (June 14, 2007)
J'accuse (June 15, 2007)
J'accuse, Part Deux (June 27, 2007)
The Taxman Cometh (July 11, 2007)
B(ogus Ta)X (July 13, 2007)

© 2009 The Epicurean Dealmaker. All rights reserved.

All Hail the New Decembrists

Trot on over, kiddies, to Your Curmudgeonly Blogosopher's new blog site, The New Decembrists, if you get half a mo'.

It is subtitled "A Public Forum for the Discussion of Financial Regulation and Reform," and, by golly, that is what it is intended to be. While Yours Truly remains for now the sole editor and inspiration for the site, I hope and expect many other contributors, commenters, and gadabouts will join the conversation about one of the more important topics of our time. While I have encountered many interesting posts, articles, and conversations about the topic of financial regulation and reform on the web, these seem to be scattered about and difficult to find. The new site is designed to be a clean, well-lighted place for all such ruminations to gather, if not in peace, then at least under one roof.

Aficionados of this site will be intrigued to learn that The New Decembrists will welcome comments, as long as they are on-topic, at least vaguely intelligent, and/or stylishly amusing. Sadly, I have no current intent to change my no-comment policy here. This is because, while I freely admit to not knowing everything there is to know about financial regulation and reform—and hence am happy to invite the thoughts of others at TND—I am unshaken in my belief that I know absolutely everything else. Allowing my Faithful Readers to comment here would merely encourage you to tell me things I already know or embarrass yourself needlessly.

Never let it be said, Dear Friends, that I am not always looking out for your welfare.

© 2009 The Epicurean Dealmaker. All rights reserved.

Thursday, December 3, 2009

A Reformist Manifesto

The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win.

Working Men of All Countries, Unite!

— Karl Marx and Friedrich Engels, Manifesto of the Communist Party

It has not escaped my notice, O Estimable and Valued Readers, that you have displayed remarkable patience with Your Dedicated Correspondent over the last many moons of the ongoing financial crisis and its aftermath. I have ranted, I have railed, and I have hopped up and down spluttering like a one-legged kangaroo rat on a hotplate over the many failures of our present regulatory system to have avoided or even anticipated the financial tsunami which rolled over us. "Sure," I have seen you mutter to yourself, "TED has fulminated rather spectacularly about what went wrong, and how idiots, nincompoops, and boobs of every stripe screwed the pooch, but what does he suggest? Does he have any ideas, or is he merely content to take potshots at financiers, regulators, and politicians and leave it at that?"

This is a fair question, and I think you deserve an definitive answer. Being none other than who I am, however, you can rightly expect that I will give it to you with both barrels. Subtlety and nuance be damned.

I know full well what I propose is at least a bridge too far, a utopian dream doomed to ignominious death in the fetid swamp of pragmatism, special interests, and meretricious compromise which poses as our vaunted Legislative Branch. A death by a thousand cuts, each made ruefully and reluctantly by unimpeachably reasonable men and women who sport weary smiles and practiced shrugs. Men and women who explain "That's just how it is," or murmur an even simpler answer: "Politics."

But even given this—given that commentators and politicians alike have been writing fulsome obituaries for financial reform since before the first draft sprang aborning from the pen of some Congressional aide—one can still ask why should we not aspire to more? Why should we not try to map out the right answer to our problems first? The simple answer, the clear answer? Then, after we have gotten our bearings, we can debate and argue until the cows come home about the details, the practicalities, and the unintended consequences we want to forestall. Right now, all this debate—if it is taking place at all—is being conducted in the back halls, offices, and lobbies of Capitol Hill, out of public view, by the self-interested financial parties we seek to regulate and the craven legislators who hold themselves in thrall to them.

This is no way to reform our financial system, much less run a representative democracy.

* * *

So let me slap some markers on the table, in the interest of public service. These are concrete ideas which have occurred to me over the course of listening, reading, and participating in the debate over regulatory reform over the last many months. I claim no originality for these ideas, and I cheerfully admit that most if not all have already been put forth by thinkers and writers who are cleverer, better educated, and more eloquent than me. If I can claim credit for anything here, it is in laying out the best of these ideas in the most extreme form. Let us set the perimeter of the debate, and the dimensions of the playing field, before we start arguing over the color of the contending teams' jerseys.

In no particular order, here we go.

1) Ban political campaign contributions by the financial industry. We currently have the best politicians money can buy. I suspect it might be conducive toward better governance should this channel of undue influence be severed. Can you disagree?

2) Narrow and focus the role of the Federal Reserve. The Fed should continue to focus on monetary policy, price stability, and employment. It should add responsibility for monitoring, controlling, and managing systemic financial risk. Of all existing or potential regulatory entities, the Fed is best placed to do the latter. On the other hand, it has failed pathetically to protect consumers, control derivatives, or manage mortgage markets. These and any other non-core duties should be summarily stripped from it. Focus, focus, focus.

3) Render Fed actions and deliberations transparent. Secrecy runs counter to the public weal. Impose a delay of three months, six months, or whatever, but open the minutes of all material Fed actions and decisions to public scrutiny after the fact. This is called accountability, and the Fed must not be immune from it.

4) Consolidate all banking supervision under one unified national regulator. No more "regulator shopping." No more races to the bottom. Should there be real functional and regulatory differences among thrifts, savings and loans, small local and regional banks, and large money center behemoths, I am sure our clever regulators can make the distinction and set up appropriately diverse and differentiated regulatory regimes. Just do it under one roof, I beg you. I have heard no defensible reason whatsoever why this does not make sense.

5) Create a separate, independent consumer financial protection agency charged with regulating all consumer financial products and services. Regulating consumer or retail financial services is different in kind from regulating wholesale or institutional products. Among other things, consumers need protection in a way institutions do not. There is absolutely no reason why consumer protections should not be monitored by a single, dedicated regulator. If it has to do with money, and consumers, this entity should regulate it. In addition to improving the position of ordinary citizens vis á vis their financial service providers, unitary regulation of this field should encourage consumer-friendly innovation across products and services, since there will be only one regulator to deal with. The only long-term question is why this entity should not take over the consumer protection functions of the SEC when it comes to securities and markets. (My answer: it should.)

6) While we're at it, why not create a national insurance regulator? Honestly, the current state-by-state regulation of insurance companies is preposterous, and massively consumer unfriendly. At base, insurance is a very simple business, and consumer choice and value should be improved by national consolidation. Why should this be an issue of states' rights? Anyone? Anyone?

7) Create an integrated regulator of wholesale and institutional financial markets. Merge the SEC and the CFTC. Bolster its combined budget. Make broker dealers and other regulated entities provide operating funds through levies. Upgrade its systems, procedures, and personnel. Double or triple its professionals' pay, and impose a minimum five-year ban on joining any financial services provider after leaving the agency. Increase accountability, esprit de corps, and morale. Hire leaders who are dedicated to turning it into an agency everybody wants to join, instead of a laughingstock. Destroy all evidence that Christopher Cox ever darkened its doors.

8) Register and monitor hedge funds. Honestly, are we going to quibble about collecting information in this space? For what, compliance and reporting fees which will add up to less than Steve Cohen spends on Chunky Monkey ice cream every month?

9) Force virtually all over the counter derivatives onto exchanges and clearinghouses. This will increase visibility, improve netting and credit relationships, bolster systemic stability, and lower costs in most instances. (More information = lower prices.) Exceptions for highly customized OTC derivatives and/or pure end-user hedging instruments should be made on a product-by-product and case-by-case basis. If nothing else, such a regime would have enabled counterparties, regulators, and other market participants to have seen stupid, reckless, unlimited naked-put writers like AIG Financial Products coming from a mile away. How, exactly, will greater transparency and easier margin and credit control increase costs in these markets? They won't. Disagree? Prove it.

10) Simplify and rationalize Congressional oversight of financial regulators. No more oversight of financial derivatives by the Agriculture Committees, I beg you. Pretty please?

* * *

Please note that I say nothing about the particular policies which these new entities should create or enforce. Nothing about the critical issues of maximum leverage, separation of commercial, retail, and investment banking, compensation, or explicit limits on firm size or connectivity. This is intentional.

While I have some firm opinions on the right answers to many of these questions, I think it is far more important to set up strong, competent, and well-informed regulators for the financial sector than to worry about policy particulars right now. For one thing, our current regulators simply do not have enough information or understanding about the current financial system to start making those kinds of decisions. And I think most reasonable observers would agree the financial system is dynamic enough to render static regulation by explicit legislation impractical, if not downright dangerous. Set up strong regulators with clear mandates and well-defined duties, and they will come up with the right policies. What we need to do now is sever some of the improper and counterproductive patterns of influence that have hobbled regulators in the past and let the overseers of the system do their job.

Simplify, simplify, simplify. The global financial system is complicated enough as it stands. We should not render its overseers' jobs more difficult by forcing their activities into outdated, counterproductive patterns designed three quarters of a century ago for a far simpler time. Sure, many of the very same professionals and regulators who fucked up so comprehensively last time will be hired into the same roles at the same or different institutions. These brand new spanking institutions themselves will be vulnerable to the same bureaucratic sclerosis, political and ideological pressures, and civil service mentality which afflicted their predecessors. But it's time to shake things up, to clear away the underbrush, and to make a clean break with the past.

And if our elected representatives in Washington are incapable of doing this, then perhaps it is time we took to the barricades ourselves.

If I had my way
If I had my way
If I had my way
I would tear this old building down

— The Grateful Dead, Samson and Delilah

What are your thoughts, Dear Readers? I am listening.

© 2009 The Epicurean Dealmaker. All rights reserved.