Banking Crisis of 2008

The federal government is proposing to buttress the commercial and investment banking sectors with $700 billion in loans. Mr. Bernanke, a scholar of the Great Depression of 1929, and his colleagues seek to prevent a recurrence of that most disastrous economic event of the 20th century. Combined with prior bail-outs, the total bill for their presumably pre-emptive cure is about six percent of the U.S. GDP.

The London bank collapse of 1825 provides a parallel to today’s financial crisis. During the London crisis, confidence in the security of Latin American and European government bonds collapsed. Most investors were unable to distinguish good debt from poor debt to the point that bonds from the imaginary Kingdom of Poyais were bought and sold! In the end, the Rothschilds’ banks proved to be safer than their peers (and ultimately, bailed out the Bank of England) because they did a better job at underwriting loans and keeping hard currency (in those days, gold) on hand. Today’s investment banks should be forced to relearn these lessons about concentrating on fundamentals in business analysis and finance.

As our leaders in Washington proceed with the bail-out, let’s hope that they incorporate meaningful safeguards against abuse. Some suggestions for them to consider:

• Develop and enact a regulatory framework and a regulatory enforcement mechanism for currently unregulated financial products and derivatives.
• Mandate basic and continuing ethics education in FINRA/NASD licensing.
• Increase fines and penalties for securities law violations, and criminalize repeated or egregious violations.
• Enforce the Sarbanes-Oxley Act as enacted (repeal subsequent relaxed regulatory interpretations such as PCAOB Auditing Standard No. 5 with respect to outside audit).
• Repeal the Gramm-Leach-Bliley Act.
• Repeal the Garn-St. Germain Depository Institutions Act.
• Investigate a repeal of the McCarran-Ferguson Act.
• For those firms receiving federal assistance,
Limit their executive compensation schemes.
Ban their pre-bail-out senior executives from working in the financial sector.
Suspend their pre-bail-out managers within their underperforming lines of business (that contributed to the need for a bail-out) from working in the financial sector.

Our leaders should strive to be more transparent about their decisions, more patient about their timing, more frugal about their spending, and more open to public input and debate. Such safeguards will help prevent the bail-out from becoming no more than money thrown from a helicopter.