Geithner 2.0: Don't Worry, I slept at a Holiday Inn
Geithner's latest on bank compensation continues a long line of fallacious thinking when it comes to effective regulation of the financial markets. Realizing that talent will flee TARP because of compensation rules, they are considering using the financial crisis as an excuse to regulate compensation at non-TARP banks, as well.
As readers of this blog are aware, the entrance and subsequent exit from the secondary market for subprime synthetics by the government sponsored entities (Fannie and Freddie) and the abject failure of the government franchisee NRSROs to accurately rate residential mortgage securities was a primary contributor to the Freeze of '07 (and Crash of '08).
The shadow credit quality market that developed in credit default swaps certainly had transparency and manipulation issues, however ultimately these instruments reflected asset changes and weren't assets themselves.
No market can remain effective when you stick $2T of fraudulently labeled securities in it, and this fraud was unsurprisingly facilitated in large part by government-sponsored actors. Meanwhile, the job the government should have been doing -- the cop on the beat to keep markets transparent and honest -- was not being done. Martha Stewart was just too big a risk to pay attention to that petty stuff like trillion dollar mortgage synthetics fraud.
So now we have a wave of promised regulations not dissimilar to Sarbanes Oxley and the Spitzer Rules that are informed by little more than the pablum of weekly talk shows and the musings of people profoundly ignorant of financial markets and what they need in order to work effectively.
Coming from a decade + of experience, I have fairly extensive thoughts on the best way to compensate people at investment banking firms. Certainly, you should not compensate people for underwriting fraudulent securities, and bonus clawbacks should be considered by the firms and their shareholders -- BUT NOT by the government.
Also, if all the grand schemes and dreams of the new Spendocracy depend on confiscating wealth from people who the free market pays more $250K to, then the Spendocrats better make sure they have some people who can make that money to tax.
As readers of this blog are aware, the entrance and subsequent exit from the secondary market for subprime synthetics by the government sponsored entities (Fannie and Freddie) and the abject failure of the government franchisee NRSROs to accurately rate residential mortgage securities was a primary contributor to the Freeze of '07 (and Crash of '08).
The shadow credit quality market that developed in credit default swaps certainly had transparency and manipulation issues, however ultimately these instruments reflected asset changes and weren't assets themselves.
No market can remain effective when you stick $2T of fraudulently labeled securities in it, and this fraud was unsurprisingly facilitated in large part by government-sponsored actors. Meanwhile, the job the government should have been doing -- the cop on the beat to keep markets transparent and honest -- was not being done. Martha Stewart was just too big a risk to pay attention to that petty stuff like trillion dollar mortgage synthetics fraud.
So now we have a wave of promised regulations not dissimilar to Sarbanes Oxley and the Spitzer Rules that are informed by little more than the pablum of weekly talk shows and the musings of people profoundly ignorant of financial markets and what they need in order to work effectively.
Coming from a decade + of experience, I have fairly extensive thoughts on the best way to compensate people at investment banking firms. Certainly, you should not compensate people for underwriting fraudulent securities, and bonus clawbacks should be considered by the firms and their shareholders -- BUT NOT by the government.
Also, if all the grand schemes and dreams of the new Spendocracy depend on confiscating wealth from people who the free market pays more $250K to, then the Spendocrats better make sure they have some people who can make that money to tax.
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