Monday, May 10, 2010

Old Bullion

Ingredients in a recipe for financial crisis:
  1. excess leverage financing questionable assets
  2. bankers with too little "skin in the game"
  3. speculation (short-termism) in lieu of wise long-term capital allocation
  4. complex non-transparent betting (customized derivatives contracts) between large institutions creating hard to gauge counter-party risk
Here is a recent column in the Washington Post written by James Grant that deals with #2.

Excerpts:

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside.

Grant later added...

"The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's.

Some well thought out incentives and sensible rules could meaningfully improve safety and soundness of the system.

The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism.

Well said, James Grant.

Adam

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