Is Anyone Listening?

“Those on Wall Street cannot resume taking risks without regard for the consequences, and expect that next time, American taxpayers will be there to break the fall.” 

President Obama, on the anniversary of Lehman’s failure

During last week’s Value Investing Congress, David Einhorn, the outstanding manager of Greenlight Capital suggested that,

These are good points that he should run by his policy team, because Secretary Geithner’s reform proposal does exactly the opposite.  The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone’s shampoo, in that it gives the appearance of officially “doing something” and adds to our bureaucracy without really making anything safer.

We whole-heartedly agree and believe that the only way to mitigate the risks created by “too-big-too-fail” is to make sure that no institution is “too-big-to-fail”.  As David went on to say,

The lesson of Lehman should not be that the government should have prevented its failure. The lesson of Lehman should be that Lehman should not have existed at a scale that allowed it to jeopardize the financial system. And the same logic applies to AIG, Fannie, Freddie, Bear Stearns, Citigroup and a couple dozen others.  Twenty-five years ago the government dismantled AT&T. Its break-up set forth decades of unbelievable progress in that industry. We can do that again here in the financial sector and we would achieve very positive social benefit with no cost that anyone can seem to explain.

Sadly, we are not alone in day-dreaming of the “good old days” when Glass-Steagall separated federally-insured commercial banks which existed solely to serve the public, with “investment” houses free to buy and sell securities for their own accounts, and free to pile on unlimited leverage thus generating unlimited profits (and risks).  Former Chairman of the Federal Reserve (no, not The Maestro who actually favored the repeal of Glass-Steagall a decade ago) and head of our current President’s Economic Recovery Board, Paul Volcker has repeatedly suggested that the only viable solution is to break up the giants.  Unfortunately, Wall Street’s darlings Timothy Geithner and Larry Summers, dismiss the 82 year-old Volcker as old-fashioned, and have somehow managed to convince Obama of the same.  When asked about his fading clout in Washington, Volcker responded, “I did not have influence to start with.”

Even so, we are not giving up just yet, but realize that it will take a lot more than comments from Greenlight’s David Einhorn, Former Fed Chairman Paul Volcker, Nobel laureate Joseph Stiglitz, and Retired Citigroup Chairman John Reed to win influence over unlimited special interest groups and deep-pocketed banking lobbyists.

http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=2

Too big to fail