daniel splittgerber - what I read online

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Idea #1: Separate proprietary trading operations from Wall Street firms
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Idea #2: Push over-the-counter assets onto exchanges
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Idea #3: Eliminate sell-side payments to rating agencies (and perhaps the agencies themselves)
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Idea #4: Revisit risk-weighted capital methodologies and move towards a mark-to-market framework
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Idea #5: Give traders an equity interest in their strategies

The most important political fact affecting health care reform is the sizable Democratic majority. There are too many Democrats in the House and Senate for a bipartisan bill to make sense.

Given that we are going to have a partisan bill, we are not going to see a bill that tries to address the issue of cost. Any measure that restrains health care spending is going to go against the interests of constituents. This sort of painful step will only be taken when both political parties are involved, with each one providing cover for the other.

At some point, the Democrats will invite Republicans to join in a genuine, bipartisan effort to control the excessive use of high-cost, low-benefit medical procedures. For now, however, the goal of a partisan bill will be to offend as few people as possible.

But that’s not the question. I don’t think anyone doubts that at $1 trillion in assets (plus derivatives exposures), Goldman is too big to fail. The real question is not whether Goldman should be in a different mix of businesses. The question is whether a $1 trillion Goldman provides any value to the world that wouldn’t be provided by four $250 billion Baby Goldmans. (Each Baby Goldman would be about the size that Goldman itself was in 1998, when it was already one of the top two investment banks in the world, and the corporate world had no apparent constraints on financing.) I don’t think Blankfein answered this question.

A BILL
To address the concept of ‘‘Too Big To Fail’’ with respect
to certain financial entities.

1 Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
3 SECTION 1. SHORT TITLE.
4 This Act may be cited as the ‘‘Too Big to Fail, Too
5 Big to Exist Act’’.
6 SEC. 2. REPORT TO CONGRESS ON INSTITUTIONS THAT
7 ARE TOO BIG TO FAIL.
8 Notwithstanding any other provision of law, not later
9 than 90 days after the date of enactment of this Act, the
10 Secretary of the Treasury shall submit to Congress a list

2

1 of all commercial banks, investment banks, hedge funds,
2 and insurance companies that the Secretary believes are
3 too big to fail (in this Act referred to as the ‘‘Too Big
4 to Fail List’’).
5 SEC. 3. BREAKING-UP TOO BIG TO FAIL INSTITUTIONS.
6 Notwithstanding any other provision of law, begin-
7 ning 1 year after the date of enactment of this Act, the
8 Secretary of the Treasury shall break up entities included
9 on the Too Big To Fail List, so that their failure would
10 no longer cause a catastrophic effect on the United States
11 or global economy without a taxpayer bailout.
12 SEC. 4. DEFINITION.
13 For purposes of this Act, the term ‘‘Too Big to Fail’’
14 means any entity that has grown so large that its failure
15 would have a catastrophic effect on the stability of either
16 the financial system or the United States economy without
17 substantial Government assistance.

Why, oh why, haven’t the broken OTC derivatives markets and rating agency crimes been aggressively pursued by lawmakers and regulators? One reason: because they are far less sexy than the exchanges and don’t DIRECTLY impact the retail investor. Not too many mom-and-pops have purchased a 5 year GM CDS or stop by Moody’s for a report on the SocGen CMBS Non-Conforming Pool XII. They are far more likely to have a brokerage account, an IRA or a self-directed 401k. What’s more systemically important, banning “flash orders” or mitigating the counterparty risk associated with tens of trillions of over-the-counter derivatives contracts? We already know the answer, since Mr. Geithner and his friends did a back-door bail-out of Wall Street with taxpayer money via the AIG gift. This was due to credit derivative counterparty performance risk, friends, not because they had a lousy stock portfolio that they couldn’t liquidate. And why do rating agencies even exist? They have simply resulted in an abrogation of responsibility on the part of investors: THEY are the true WMDs, which is ironic considering Mr. Buffet’s long-standing position in Moody’s. Yet we seldom hear about this.

Sadly, we live in a world of sound bites, and Congress and the White House have found far better sound bites to attack the denizens of the equity markets rather than the derivatives and debt markets. And as usual, it will be this stupidity that will cost us all, except the Congresspeople who will have pandered to their constituents in order to get re-elected.

It continually baffles me that not only are there lots of infertile couples desperate for a child, or an additional one, as well as couples desperate to adopt; yet there are huge barriers to adoption and millions of young women have abortions every year. I’m not fond of the idea of government subsidies for carrying children to term, but I would probably get behind some sort of free-market solution; and probably anything is better than the current situation. Yet many people my age are more concerned about where their styrofoam cup or plastic bottle might end up, because that might hypothetically hurt someone, or, heaven forbid, some polar bear, in a future generation. That’s considered being conscientious and socially just and politically aware.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

China’s economy is still less than a third the size of America’s at market exchange-rates. Its GDP per head is one-fourteenth that of America. The innovation gap between the two countries remains huge. America’s defence budget is still six times China’s. As for the Treasury bills, dumping them is not an option for China: a tumbling dollar would hurt its own economy (see article). And as American consumers spend less, while Chinese stimulus boosts its domestic spending, the huge and politically troublesome trade imbalances are shrinking. In the meantime, the danger of overegging China’s economic expansion abroad is that it will fuel protectionism at a time when American unemployment is painfully high.

In terms of geopolitical power, China has neither the clout nor the inclination to challenge America. Confidently though China’s leaders now strut the world stage, they remain preoccupied by simmering discontent at home: there are tens of thousands of protests each year. For all the economic progress, all sorts of tensions—social, cultural, demographic, even religious—haunt the regime and help explain why it resorts to nationalism so often. So it is odd, and wrong, that America’s approach towards China is driven by its own insecurities.

How on earth did Paulson think this was OK? Goldman Sachs was a hugely powerful for-profit investment bank, and there he is, giving private chapter and verse on his opinions about the US and global economy, talking about internal Treasury matters, and previewing an upcoming (and surely market-moving) speech. All in secret, at a “social event” which somehow got kept off his official calendar. Oh, yes, and one other thing — the whole shebang took place in the Moscow Marriott Grand Hotel, in the context of Goldman directors joking about how all the Moscow hotels were surely bugged.