Useful rules should be enforced

By DAVID MOON, Moon Capital Management, LLC
February 28, 2010

A couple of weeks ago, my family was passing through security at Knoxville’s McGhee Tyson Airport. We looked like the Griswolds on vacation, and I was Chevy Chase. In between fighting with each other, my nine-year-olds were taking pictures of each other. My wife was carrying a stack of Fodor’s travel guides and I was trying to unfold our boarding passes from the tiny wad I had shoved into my front pocket.

We were a traveling circus.

We were also, apparently, a security risk.

My blond-haired, blued-eyed child was pulled aside for enhanced examination techniques. My wife was chastised for trying to smuggle four ounces of Curel lotion aboard our flight.

Things began to go downhill after I suggested to the TSA officer that she simply be allowed to squirt an ounce onto her hands and bring the container down to the allotted three ounces. I was afraid I might find myself on the Group W bench, shoeless and beltless, with a bunch of father stabbers and Arlo Guthrie.

As a society, we pass rules to fight the last war, and then often don’t even enforce the useful rules when needed. It happens in the airport.

It is also happening in the banking industry. Look at the much-heralded “Volcker Rule.”

Nicknamed for former Federal Reserve Board Chairman Paul Volcker, this proposal attempts to separate commercial banking operations (like taking deposits and making loans) from investment banking and proprietary trading activities.

The intent is to keep riskier investment activities away from the balance sheets of FDIC-insured institutions, thereby protecting banks from themselves and their possibly ill-advised investment decisions.

That sounds great – in theory. In reality, however, we have evidence that this sort of rule works a lot like airport security: we strip search obvious tourists, while allowing folks on terrorist watch lists who look, act and sound like terrorists to board planes in known terrorist haunts – without a passport.

Following the last massive US banking crisis, Congress passed the Glass-Steagall Act in 1933 requiring the separation of commercial and investment banking operations.

Glass-Steagall was effectively repealed in 1999 although many firms never bothered to become actual banks until they needed a bailout. Companies like Goldman Sachs were granted bank charters in 2008 specifically to provide them the protections then being afforded to the commercial banking industry.

This is a lot like being able to buy automobile insurance after having an accident.

GMAC wasn’t a bank…not until the Federal Reserve Board approved its bank charter in December 2008, specifically to allow the car finance company to qualify for $6 billion in government bailout money.

Small business lender CIT was struggling in late 2008. The Fed declared it a bank. American Express? It is now a bank. Morgan Stanley? Discover Financial? Bank. Bank. But only after catastrophe struck the financial industry.

As long as we rely on regulations to enforce market discipline, those regulations will always be subject to manipulation by the folks with the most political clout. Allowing Goldman Sachs, Merrill Lynch and a host of other businesses to fail would have compelled more market discipline than a thousand Volcker rules.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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