Regulations, not regulators, needed

By DAVID MOON, Moon Capital Management, LLC
July 25, 2010


When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act on Wednesday, it was described as the most sweeping financial regulation since the aftermath of the Great Depression.

Good people can honestly argue about whether or not the actions of large banks are the root of our financial problems, or a reflection of them. If Congress decides that companies’ actions are the cause of the problems however, then we should pass regulations that limit these actions.

Instead, we now have a massive act that mostly creates new agencies and gives broad, yet non-specified powers to these new and existing agencies.

The soon-to-be created Financial Services Oversight Council is under the direction of the Treasury Department. Its primary charge is to identify emerging risks in the financial system.

Don’t we already have some geeky people somewhere doing that? Not only is that a subjective task that generates disagreement even among the smartest economists and investors in the world, we’re putting this agency under the control of Timothy Geithner. Secretary Geithner was head of the New York Fed when the banks under his direct supervision were running wild. He never saw any emerging risks there.

He didn’t even see any emerging risks on his personal tax return when he forgot to include a few years of his income from the International Monetary Fund.

When we try to solve systemic problems by relying on regulators, we place ourselves at the mercy of people. Human, fallible people. Now I’m generally in favor of people over government, but I’m in favor of individuals, not monarchs. When Tim Geithner is given expanded power to seize and nationalize a larger, still undefined list of financial institutions – which this Act does – he becomes a monarch.

So do the next President and Treasury Secretary.

If we’re going to attempt to place legislative restraints on the financial system, we should rely on regulations, not regulators. People need to know the rules.

Most of the problems of the past three years can be traced to failures of human behavior, not rules or systems.

A checklist is no good if it isn’t followed.

If the next Madoff Investment Securities is allowed to escape a regulator’s scrutiny because of Bernie’s sterling reputation, we won’t need an SEC. We won’t need a Financial Services Oversight Council.

We need to publicly flog the guilty regulators.

If big banks make too many bad loans and place their equity base at risk, we don’t need to create a new category of Tier 1 Financial Holding Companies subject to some yet-to-be determined higher capital requirements.

That makes banking regulation even more political, if that was possible.

Personally, I lean toward letting people fully live with the consequences of their poor decisions, whether they are extended credit card borrowers or FNMA board members.

But if we are going to attempt a legislative fix, I would much rather establish fixed, unambiguous rules, rather than put more subjective power in the hands of politically appointed bureaucrats.

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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