Our Slip Is Showing

It was only last weekend that the Fed stepped in and averted a huge train wreck with the sale of Bear Stearns to JP Morgan. Beyond that, the Fed added new tools to its tool bag in permitting investment houses to shore up their liquidity like commercial banks. The Fed arranged for bond swaps for the investment houses that before the present credit crisis was unheard of.

Yet with all this going on, on the front page of Sunday’s New York Times, column six features an article titled Split Is Forming Over Regulation Of Wall Street, New Powers Proposed, Such Steps Could Stall Economy’s Recovery Opponents Say.

The meat-eaters of Wall Street are worried that new regulations might restrict or eliminate their ability to run down fresh game. On the plains of Africa, the big cats kill only what they need to feed themselves and their pride, but on Wall Street, there is no such thing as too much dead meat. The old, the weak and the young are all fair game for these big cats. Wall Street does not need Washington's politicians and regulators interfering with their food chain. However, when they get into trouble, then it is fine for Washington and the Fed to throw them a life line. Should not privilege be accompanied by responsibility?

I knew this debate was coming weeks ago. This is not the first time Wall Street has killed more than it can eat. Yet every time there is a crisis the lines are drawn and the debate begins, more or less regulation, new or better oversight. If investment banks are going to be treated to the privileges of the commercial banks, then common sense would follow that they would have to adhere to the same responsibilities as commercial banks with regards to reserve requirements and reporting. But this does not answer the question with regards to the rating agencies, who I see as one of the weakest links in the system. The securitization of asset-backed credits, like sub prime mortgages, needs a rating system that works and can not be compromised.

A bureau of weights and measures is a good thing, without it, commerce could not function. Aside from the fact that a two-by-four stud is no longer two inches by four inches, weights and measures are a very necessary thing for commerce to work effectively. Somehow or someway, the present system of placing ratings on bonds by private companies engaged in this craft needs to be reviewed. If the present system remains in place, Wall Street and the nation will be revisiting this problem again in the future. Bond ratings must stand for something! If the credit work done behind the scenes is suspect, the whole rating system is worthless. The present credit crisis is not the first time that the ratings on bond issues have been in part the cause of a crisis of confidence. The rating function is too important to have its inherit problems of weakness be swept under the carpet. Washington needs to take a look at giving this function its attention too.

New and more comprehensive regulation is imperative to the success of our whole financial system. As a major player in the world of financial instruments, the United States should take the lead and set the gold standard for oversight. New financial products will be crafted to meet the needs for credit and risk management as our economy evolves. This should not be thwarted, but common sense would dictate that the present patchwork system of regulation is not up to the task that confronts us all. As a nation that is dependent upon investors and countries around the world as buyers of our debt, it would seem to me that a high level of confidence in our system of regulation would be axiomatic. Stay tuned.